##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10Q



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(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended September 30, 2005



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from
 to



Commission file number 030777



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PACIFIC MERCANTILE BANCORP

(Exact name of Registrant as specified in its charter)



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|                                                              |  |                                       
|------------------------------------------------------------- |  | --------------------------------------
|California                                                    |  | 330898238                            
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification Number)



|                                                        |  |           
|------------------------------------------------------- |  | ----------
|949 South Coast Drive, Suite 300,Costa Mesa, California |  | 92626     
|(Address of principal executive offices)                |  | (Zip Code)



(714) 4382500

(Registrants telephone number, including area code)



Not Applicable

(Former name, former address and former fiscal year, if changed, since last year)



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Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for
the past 90 days. Yes x    No ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes x    No ̈



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes ̈No x



APPLICABLE ONLY TO CORPORATE ISSUERS:



Indicate the number of shares outstanding of each of the issuers classes of common
stock, as of the latest practicable date.



10,176,008 shares of
Common Stock as of November 3, 2005



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##### Table of Contents



PACIFIC MERCANTILE BANCORP

QUARTERLY REPORT ON FORM 10Q

FOR

THE QUARTER ENDED SEPTEMBER 30, 2005



TABLE OF CONTENTS



|                                                                                                          |  |                                                                                                                |  |         
|--------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------- |  | --------
|                                                                                                          |  |                                                                                                                |  | Page No.
|Part I                                                                                                    |  | Financial Information                                                                                          |  |         
|                                                                                                          |  |                                                                                                               
|Item 1.                                                                                                   |  | Financial Statements                                                                                           |  | 1       
|                                                                                                          |  | Consolidated Statements of Financial Condition at September 30, 2005 and December 31, 2004                     |  | 1       
|                                                                                                          |  | Consolidated Statements of Income for the Three and Nine Months ended September 30, 2005 and 2004              |  | 2       
|                                                                                                          |  | Consolidated Statement of Comprehensive Income for the Three and Nine Months ended September 30, 2005 and 2004 |  | 3       
|                                                                                                          |  | Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2005 and 2004                    |  | 4       
|                                                                                                          |  | Notes to Consolidated Financial Statements                                                                     |  | 5       
|Item 2.                                                                                                   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                          |  | 10      
|                                                                                                          |  | Risks and Uncertainties That Could Affect Our Future Financial Performance                                     |  | 27      
|Item 3.                                                                                                   |  | Market Risk                                                                                                    |  | 31      
|Item 4.                                                                                                   |  | Controls and Procedures                                                                                        |  | 31      
|                                                                                                          |  |                                                                                                               
|Part II.                                                                                                  |  |                                                                                                                |  |         
|                                                                                                          |  |                                                                                                               
|Item 6.                                                                                                   |  | Exhibits                                                                                                       |  | 32      
|                                                                                                          | 
|Signatures                                                                                                |  | S1                                                                                                           
|                                                                                                          | 
|Exhibit Index                                                                                             |  | E1                                                                                                           
|                                                                                                          | 
|Exhibit 31.1 Certification of Chief Executive Officer under Section 302 of the SarbanesOxley Act of
2002 |  |                                                                                                               
|                                                                                                          | 
|Exhibit 31.2 Certification of Chief Financial Officer under Section 302 of the SarbanesOxley Act of
2002 |  |                                                                                                               
|                                                                                                          | 
|Exhibit 32.1 Certification of Chief Executive Officer under Section 906 of the SarbanesOxley Act of
2002 |  |                                                                                                               
|                                                                                                          | 
|Exhibit 32.2 Certification of Chief Financial Officer under Section 906 of the SarbanesOxley Act of
2002 |  |                                                                                                               



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##### Table of Contents



PART I.  FINANCIAL
INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS
|------- | --------------------



PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands)



(Unaudited)



|                                                                                                                                                                            |  |                   |         |   |                  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                            |  | September 30,2005 |         |   | December 31,2004 |  
|ASSETS                                                                                                                                                                      |  |                   |         |   |                  |   |         |  
|Cash and due from banks                                                                                                                                                     |  | $                 | 36,956  |   |                  | $ | 26,509  |  
|Federal funds sold                                                                                                                                                          |  |                   | 40,000  |   |                  |   | 69,600  |  
|                                                                                                                                                                            |  |                   |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                                   |  |                   | 76,956  |   |                  |   | 96,109  |  
|Interest-bearing deposits with financial institutions                                                                                                                       |  |                   | 426     |   |                  |   | 738     |  
|Federal Reserve Bank and Federal Home Loan Bank Stock, at cost                                                                                                              |  |                   | 12,217  |   |                  |   | 10,662  |  
|Securities available for sale, at fair value                                                                                                                                |  |                   | 238,542 |   |                  |   | 169,412 |  
|Loans held for sale, at fair value                                                                                                                                          |  |                   | 828     |   |                  |   | 42,348  |  
|Loans (net of allowances of $4,690 and $4,032, respectively)                                                                                                                |  |                   | 590,317 |   |                  |   | 511,827 |  
|Investment in unconsolidated subsidiaries                                                                                                                                   |  |                   | 837     |   |                  |   | 837     |  
|Accrued interest receivable                                                                                                                                                 |  |                   | 3,543   |   |                  |   | 2,539   |  
|Premises and equipment, net                                                                                                                                                 |  |                   | 2,654   |   |                  |   | 2,987   |  
|Other assets                                                                                                                                                                |  |                   | 7,109   |   |                  |   | 8,080   |  
|                                                                                                                                                                            |  |                   |         |   |                  |   |         |  
|Total assets                                                                                                                                                                |  | $                 | 933,429 |   |                  | $ | 845,539 |  
|                                                                                                                                                                            |  |                   |         |   |                  |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                        |  |                   |         |   |                  |   |         |  
|Deposits:                                                                                                                                                                   |  |                   |         |   |                  |   |         |  
|Noninterest-bearing                                                                                                                                                         |  | $                 | 191,131 |   |                  | $ | 175,329 |  
|Interest-bearing                                                                                                                                                            |  |                   | 371,365 |   |                  |   | 358,234 |  
|                                                                                                                                                                            |  |                   |         |   |                  |   |         |  
|Total deposits                                                                                                                                                              |  |                   | 562,496 |   |                  |   | 533,563 |  
|Borrowings                                                                                                                                                                  |  |                   | 259,706 |   |                  |   | 204,754 |  
|Accrued interest payable                                                                                                                                                    |  |                   | 1,464   |   |                  |   | 1,259   |  
|Other liabilities                                                                                                                                                           |  |                   | 3,806   |   |                  |   | 3,150   |  
|Junior subordinated debentures                                                                                                                                              |  |                   | 27,837  |   |                  |   | 27,837  |  
|                                                                                                                                                                            |  |                   |         |   |                  |   |         |  
|Total liabilities                                                                                                                                                           |  |                   | 855,309 |   |                  |   | 770,563 |  
|                                                                                                                                                                            |  |                   |         |   |                  |   |         |  
|Commitments and contingencies                                                                                                                                               |  |                   |        |   |                  |   |        |  
|Shareholders equity:                                                                                                                                                       |  |                   |         |   |                  |   |         |  
|Preferred stock, no par value, 2,000,000 shares authorized, none issued                                                                                                     |  |                   |        |   |                  |   |        |  
|Common stock, no par value, 20,000,000 shares authorized, 10,176,008 and 10,084,381 shares issued and outstanding at September 30, 2005
and December 31, 2004, respectively |  |                   | 69,078  |   |                  |   | 69,028  |  
|Retained earnings                                                                                                                                                           |  |                   | 11,507  |   |                  |   | 7,420   |  
|Accumulated other comprehensive loss                                                                                                                                        |  |                   | (2,465  | ) |                  |   | (1,472  | )
|                                                                                                                                                                            |  |                   |         |   |                  |   |         |  
|Total shareholders equity                                                                                                                                                  |  |                   | 78,120  |   |                  |   | 74,976  |  
|                                                                                                                                                                            |  |                   |         |   |                  |   |         |  
|Total liabilities and shareholders equity                                                                                                                                  |  | $                 | 933,429 |   |                  | $ | 845,539 |  
|                                                                                                                                                                            |  |                   |         |   |                  |   |         |  



The accompanying notes
are an integral part of these consolidated financial statements.



1



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##### Table of Contents

Part I. Item 1. (continued)



PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except for per share data)

(Unaudited)



|                                                         |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |           
|-------------------------------------------------------- |  | ------------------------------- | ---------- | ------------------------------ | ---- | - | ---------- |  | - | ---------- | - |  | - | ----------
|                                                         |  | Three Months EndedSeptember 30, |            | Nine Months EndedSeptember 30,
|                                                         |  | 2005                            |            |                                | 2004 |   | 2005       |  |   | 2004      
|Interest income:                                         |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |           
|Loans, including fees                                    |  | $                               | 9,436      |                                |      | $ | 6,568      |  | $ | 25,174     |   |  | $ | 17,421    
|Federal funds sold                                       |  |                                 | 360        |                                |      |   | 64         |  |   | 1,008      |   |  |   | 266       
|Securities available for sale and stock                  |  |                                 | 2,345      |                                |      |   | 2,096      |  |   | 6,408      |   |  |   | 6,464     
|Interest-bearing deposits with financial institutions    |  |                                 | 5          |                                |      |   | 41         |  |   | 11         |   |  |   | 47        
|                                                         |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |           
|Total interest income                                    |  |                                 | 12,146     |                                |      |   | 8,769      |  |   | 32,601     |   |  |   | 24,198    
|Interest expense:                                        |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |           
|Deposits                                                 |  |                                 | 2,553      |                                |      |   | 1,698      |  |   | 6,776      |   |  |   | 5,003     
|Borrowings                                               |  |                                 | 2,030      |                                |      |   | 1,283      |  |   | 5,076      |   |  |   | 3,517     
|                                                         |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |           
|Total interest expense                                   |  |                                 | 4,583      |                                |      |   | 2,981      |  |   | 11,852     |   |  |   | 8,520     
|                                                         |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |           
|Net interest income                                      |  |                                 | 7,563      |                                |      |   | 5,788      |  |   | 20,749     |   |  |   | 15,678    
|Provision for loan losses                                |  |                                 | 340        |                                |      |   | 50         |  |   | 690        |   |  |   | 923       
|                                                         |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |           
|Net interest income after provision for loan losses      |  |                                 | 7,223      |                                |      |   | 5,738      |  |   | 20,059     |   |  |   | 14,755    
|                                                         |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |           
|Noninterest income                                       |  |                                 | 461        |                                |      |   | 561        |  |   | 1,371      |   |  |   | 1,636     
|Noninterest expense                                      |  |                                 | 4,826      |                                |      |   | 3,951      |  |   | 13,646     |   |  |   | 11,388    
|                                                         |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |           
|Income before income taxes                               |  |                                 | 2,858      |                                |      |   | 2,348      |  |   | 7,784      |   |  |   | 5,003     
|Income tax expense                                       |  |                                 | 1,164      |                                |      |   | 974        |  |   | 3,196      |   |  |   | 2,062     
|                                                         |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |           
|Income from continuing operations                        |  |                                 | 1,694      |                                |      |   | 1,374      |  |   | 4,588      |   |  |   | 2,941     
|(Loss) income from discontinued operations, net of taxes |  |                                 | (211       | )                              |      |   | 108        |  |   | (501       | ) |  |   | 266       
|                                                         |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |           
|Net income                                               |  | $                               | 1,483      |                                |      | $ | 1,482      |  | $ | 4,087      |   |  | $ | 3,207     
|                                                         |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |           
|Net income (loss) per share basic:                       |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |           
|Income from continuing operations                        |  | $                               | 0.16       |                                |      | $ | 0.14       |  | $ | 0.45       |   |  | $ | 0.29      
|(Loss) income from discontinued operations               |  | $                               | (0.02      | )                              |      | $ | 0.01       |  | $ | (0.05      | ) |  | $ | 0.03      
|Net income                                               |  | $                               | 0.14       |                                |      | $ | 0.15       |  | $ | 0.40       |   |  | $ | 0.32      
|                                                         |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |           
|Net income (loss) per share diluted:                     |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |           
|Income from continuing operations                        |  | $                               | 0.16       |                                |      | $ | 0.13       |  | $ | 0.43       |   |  | $ | 0.28      
|(Loss) income from discontinued operations               |  | $                               | (0.02      | )                              |      | $ | 0.01       |  | $ | (0.05      | ) |  | $ | 0.02      
|Net income                                               |  | $                               | 0.14       |                                |      | $ | 0.14       |  | $ | 0.38       |   |  | $ | 0.30      
|                                                         |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |           
|Weighted average number of shares:                       |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |           
|Basic                                                    |  |                                 | 10,175,505 |                                |      |   | 10,082,248 |  |   | 10,149,525 |   |  |   | 10,081,690
|Diluted                                                  |  |                                 | 10,648,392 |                                |      |   | 10,551,854 |  |   | 10,582,888 |   |  |   | 10,524,578



The accompanying notes
are an integral part of these consolidated financial statements.



2



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##### Table of Contents

Part I. Item 1. (continued)



PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES



CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Dollars in thousands)

(Unaudited)



|                                                                                     |  |                                 |       |                                |      |   |       |  |   |       |   |  |   |      
|------------------------------------------------------------------------------------ |  | ------------------------------- | ----- | ------------------------------ | ---- | - | ----- |  | - | ----- | - |  | - | -----
|                                                                                     |  | Three MonthsEnded September 30, |       | Nine MonthsEnded September 30,
|                                                                                     |  | 2005                            |       |                                | 2004 |   | 2005  |  |   | 2004 
|Net income                                                                           |  | $                               | 1,483 |                                |      | $ | 1,482 |  | $ | 4,087 |   |  | $ | 3,207
|Other comprehensive (loss) gain, net of tax:                                         |  |                                 |       |                                |      |   |       |  |   |       |   |  |   |      
|Change in unrealized (loss) gain on securities available for sale, net of tax effect |  |                                 | (982  | )                              |      |   | 1,950 |  |   | (993  | ) |  |   | 437  
|                                                                                     |  |                                 |       |                                |      |   |       |  |   |       |   |  |   |      
|Total comprehensive income                                                           |  | $                               | 501   |                                |      | $ | 3,432 |  | $ | 3,094 |   |  | $ | 3,644
|                                                                                     |  |                                 |       |                                |      |   |       |  |   |       |   |  |   |      



The accompanying notes
are an integral part of these consolidated financial statements.



3



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##### Table of Contents

Part I. Item 1. (continued)



PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)



|                                                                                                                        |  |                                |          |   |      |   |          |  
|----------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | -------- | - | ---- | - | -------- | -
|                                                                                                                        |  | Nine Months endedSeptember 30, |         
|                                                                                                                        |  | 2005                           |          |   | 2004 |  
|Cash Flows From Operating Activities:                                                                                   |  |                                |          |   |      |   |          |  
|Income from continuing operations                                                                                       |  | $                              | 4,588    |   |      | $ | 2,941    |  
|(Loss) income from discontinued operations                                                                              |  |                                | (501     | ) |      |   | 266      |  
|Adjustments to reconcile net income to net cash provided by operating activities:                                       |  |                                |          |   |      |   |          |  
|Depreciation and amortization                                                                                           |  |                                | 829      |   |      |   | 800      |  
|Provision for loan losses                                                                                               |  |                                | 690      |   |      |   | 923      |  
|Net amortization of premium (discount) on securities                                                                    |  |                                | 1,049    |   |      |   | 1,625    |  
|Net gains on sales of securities available for sale                                                                     |  |                                |         |   |      |   | (369     | )
|Net gains on sales of loans held for sale                                                                               |  |                                | (1,133   | ) |      |   | (1,364   | )
|Net gain on sale of fixed assets                                                                                        |  |                                | (15      | ) |      |   |         |  
|Net gain on sale of other real estate owned                                                                             |  |                                |         |   |      |   | (117     | )
|Net increase in accrued interest receivable                                                                             |  |                                | (1,004   | ) |      |   | (331     | )
|Net decrease (increase) in other assets                                                                                 |  |                                | 2,076    |   |      |   | (1,608   | )
|Net (increase) decrease in deferred taxes                                                                               |  |                                | (481     | ) |      |   | 327      |  
|Net decrease (increase) in accrued interest payable                                                                     |  |                                | 205      |   |      |   | (222     | )
|Net decrease in other liabilities                                                                                       |  |                                | 656      |   |      |   | 1,323    |  
|Proceeds from sales of loans held for sale                                                                              |  |                                | 141,124  |   |      |   | 227,721  |  
|Originations and purchases of loans held for sale                                                                       |  |                                | (98,255  | ) |      |   | (230,716 | )
|Mark to market (gain) loss adjustment of loans held for sale                                                            |  |                                | (216     | ) |      |   | 82       |  
|Mark to market (gain) loss adjustment of equity securities                                                              |  |                                | 6        |   |      |   | (11      | )
|                                                                                                                        |  |                                |          |   |      |   |          |  
|Net cash provided by operating activities                                                                               |  |                                | 49,618   |   |      |   | 1,270    |  
|Cash Flows From Investing Activities:                                                                                   |  |                                |          |   |      |   |          |  
|Net decrease (increase) in interest-bearing deposits with financial institutions                                        |  |                                | 312      |   |      |   | (330     | )
|Maturities of, proceeds from sales of and principal payments received for securities available for sale and other stock |  |                                | 47,187   |   |      |   | 115,718  |  
|Purchase of securities available for sale and other stock                                                               |  |                                | (120,544 | ) |      |   | (68,081  | )
|Net increase in loans                                                                                                   |  |                                | (79,180  | ) |      |   | (131,433 | )
|Proceeds from sale of other real estate owned                                                                           |  |                                |         |   |      |   | 1,634    |  
|Proceeds from sale of fixed assets                                                                                      |  |                                | 15       |   |      |   |         |  
|Purchases of premises and equipment                                                                                     |  |                                | (496     | ) |      |   | (558     | )
|                                                                                                                        |  |                                |          |   |      |   |          |  
|Net cash used in investing activities                                                                                   |  |                                | (152,706 | ) |      |   | (83,050  | )
|Cash Flows From Financing Activities:                                                                                   |  |                                |          |   |      |   |          |  
|Net increase in deposits                                                                                                |  |                                | 28,933   |   |      |   | 19,433   |  
|Offering expenses from sale of common stock                                                                             |  |                                |         |   |      |   | (38      | )
|Proceeds from exercise of stock options                                                                                 |  |                                | 50       |   |      |   | 7        |  
|Net increase in borrowings                                                                                              |  |                                | 54,952   |   |      |   | 69,777   |  
|                                                                                                                        |  |                                |          |   |      |   |          |  
|Net cash provided by financing activities                                                                               |  |                                | 83,935   |   |      |   | 89,179   |  
|                                                                                                                        |  |                                |          |   |      |   |          |  
|Net (decrease) increase in cash and cash equivalents                                                                    |  |                                | (19,153  | ) |      |   | 7,399    |  
|Cash and Cash Equivalents, beginning of period                                                                          |  |                                | 96,109   |   |      |   | 59,785   |  
|                                                                                                                        |  |                                |          |   |      |   |          |  
|Cash and Cash Equivalents, end of period                                                                                |  | $                              | 76,956   |   |      | $ | 67,184   |  
|                                                                                                                        |  |                                |          |   |      |   |          |  
|Supplementary Cash Flow Information:                                                                                    |  |                                |          |   |      |   |          |  
|Cash paid for interest on deposits and other borrowings                                                                 |  | $                              | 12,281   |   |      | $ | 8,932    |  
|                                                                                                                        |  |                                |          |   |      |   |          |  
|Cash paid for income taxes                                                                                              |  | $                              | 2,049    |   |      | $ | 1,577    |  
|                                                                                                                        |  |                                |          |   |      |   |          |  
|Non-Cash Investing Activities:                                                                                          |  |                                |          |   |      |   |          |  
|Transfer of loan to other real estate owned                                                                             |  | $                              |         |   |      | $ | 1,517    |  
|Net (decrease) increase in net unrealized gains and losses on securities held for sale, net of income tax               |  | $                              | (993     | ) |      | $ | 437      |  
|                                                                                                                        |  |                                |          |   |      |   |          |  



The accompanying notes
are an integral part of these consolidated financial statements.



4



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##### Table of Contents

Part I. Item 1. (continued)



PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES



Notes to Consolidated Financial Statements

(Unaudited)



|1. | Nature of Business
|-- | ------------------



The consolidated financial statements include the accounts of Pacific Mercantile Bancorp (PMBC) and its wholly owned subsidiaries, which are
Pacific Mercantile Bank (the Bank) and PMB Securities Corp. (which, together with PMBC, shall be referred to as the Company or as we, us or our). The Bank is chartered by the California
Department of Financial Institutions (the DFI) and is a member of the Federal Reserve Bank of San Francisco (FRB). In addition, the deposit accounts of the Banks customers are insured by the Federal Deposit Insurance
Corporation (FDIC) up to the maximum amount allowed by law.



Substantially all of our operations are conducted and substantially all our assets are owned by the Bank, which accounts for substantially all of our consolidated revenues and expenses, and earnings. The Bank provides a full range of
banking services to small and medium-size businesses, professionals and the general public in Orange, Los Angeles, San Bernardino and San Diego Counties of California and is subject to competition from other financial institutions conducting
operations in those same markets.



PMB Securities Corp., which
commenced operations in June 2002, is an SEC registered securities brokerdealer that is engaged in the retail securities brokerage business and is a member firm of the National Association of Securities Dealers.



During 2002, we organized three business trusts, under the names Pacific
Mercantile Capital Trust I, PMB Capital Trust I, and PMB Statutory Trust III, respectively, to facilitate our issuance of an aggregate of $17 million principal amount of junior subordinated debentures, all with maturity dates in 2032. In October
2004, we organized PMB Capital Trust III to facilitate our issuance of an additional $10 million principal amount of junior subordinated debentures, with a maturity date in 2034. In accordance with applicable accounting standards, the financial
statements of these trusts are not included in the Companys consolidated financial statements. See Note 2: Significant Accounting Policies  Principles of Consolidation below.



|2. | Significant Accounting Policies
|-- | -------------------------------



The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10Q and, therefore, do
not include all footnotes that would be necessary for a fair presentation of financial position, results of operations, changes in cash flows and comprehensive income (loss) in accordance with generally accepted accounting principles in the United
States (GAAP). However, these interim financial statements reflect all adjustments (consisting of normal recurring adjustments and accruals) which, in the opinion of our management, are necessary for a fair presentation of our results
for the interim periods presented.



These unaudited
consolidated financial statements have been prepared in accordance with a basis consistent with prior periods, and should be read in conjunction with our audited consolidated financial statements as of and for the year ended December 31, 2004
and the notes thereto included in our Annual Report on Form 10K for the fiscal year ended December 31, 2004, as filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934.



However, as described below under the subcaption Discontinued
Operations in this Note 2, in the second quarter of 2005, the Company decided to discontinue its wholesale mortgage lending business and, therefore, the financial information for that segment of our business is presented as discontinued
operations, separate from the financial information for our commercial banking and securities brokerage business, which comprise our continuing operations.



Our consolidated financial position at September 30, 2005, and the consolidated results of our operations for the three and nine month periods ended
September 30, 2005, are not necessarily indicative of what our financial position will be as of the end of, or of the results of operations that may be expected for any other interim period during or for the full year ending December 31,
2005.



5



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##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.-)



|2. | Significant Accounting Policies (Cont.-)
|-- | ----------------------------------------



Use of Estimates



The preparation of the financial statements in conformity with generally accepted accounting principles requires management
to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.



Principles of
Consolidation



The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries Pacific Mercantile Bank and PMB Securities Corp. All significant intercompany accounts and transactions have been eliminated in consolidation. Our wholly owned trust subsidiaries,
Pacific Mercantile Capital Trust I, PMB Capital Trust I, PMB Statutory Trust III, and PMB Capital Trust III (the Trust Subsidiaries), are not included in our consolidated financial statements, in accordance with Financial Interpretation
Number (FIN) 46R, Consolidated of Variable Interest Entities, issued by the Financial Accounting Standards Board (FASB).



Nonperforming Loans and Other Assets



At September 30, 2005, we had $1.4 million in nonaccrual and impaired loans, but we had no restructured loans and no loans that were past due as to
principal for 90 days or more that were still accruing interest.



Income Per Share



Basic income per
share for any fiscal period is computed by dividing net income for such period by the weighted average number of common shares outstanding during that period. Diluted income per share reflects the potential dilution that could have occurred assuming
all outstanding options or warrants to purchase our shares of common stock at exercise prices that were less than the market price of our shares were exercised into common stock, thereby increasing the number of shares outstanding during the period.



Stock-Based Employee Compensation Plans



We account for stock-based employee compensation as
prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, and have adopted the disclosure provisions of Statements of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock Based
Compensation. SFAS No. 123 requires pro-forma disclosures of our consolidated net income and net income per share as if the fair value based method of accounting for stock based awards had been applied. Under the fair value based method,
compensation cost is recorded based on the value of the award at the grant date and is recognized over the employees period of service with the Company. In December 2004, Financial Accounting Standards Board (FASB) issued SFAS
No. 123(R), Share-Based Payment, which requires entities that grant stock options and shares to employees to recognize the fair value of those options and shares as compensation cost over their respective service (vesting) periods
in their financial statements. SFAS No. 123(R) is effective beginning in the first quarter of fiscal years ending after June 15, 2005. Accordingly, in the Companys case SFAS No. 123(R) will be effective as of
January 1, 2006. SFAS No. 123(R) is expected to result in an increase in our reported compensation expense; however, the materiality of SFAS No. 123(R) on our results of operations cannot be accurately estimated at this time, as that
will depend on the market values of our shares, the amounts of share based awards that we may grant, in future periods and the method adopted to implement SFAS No. 123(R).



Effective March 2, 1999, our Board of Directors adopted, and in January 2000 our shareholders approved, the 1999 Stock
Option Plan (the 1999 Option Plan). That Plan authorizes the granting of options to directors, officers and other key employees that entitle them to purchase shares of common stock of the Company at a price per share equal to or above
the fair market value of the Companys shares on the respective grant dates of the awards. Options may vest immediately or over various periods, generally ranging up to five years, as determined by the Compensation Committee of our Board of
Directors at the time it approves the grant of options under the 1999 Option Plan. Options may be granted for terms of up to 10 years, but will terminate upon termination of service, if sooner. A total of 1,248,230 shares were authorized for
issuance under the 1999 Option Plan (which number has been adjusted for stock splits effectuated subsequent to the Plans adoption).



6



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##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.-)



|2. | Significant Accounting Policies (Cont.-)
|-- | ----------------------------------------



Effective February 17, 2004, the Board of Directors adopted the Pacific Mercantile Bancorp 2004
Stock Incentive Plan (the 2004 Plan), which was approved by the Companys shareholders in May 2004. That Plan authorizes the granting of options and rights to purchase restricted stock to directors, officers and other key employees,
that entitle them to purchase shares of common stock of the Company at a price per share equal to or above the fair market value of the Companys shares on the date the option is granted or the stock purchase rights are awarded. Options and
restricted stock purchase rights may vest immediately or over various periods of up to five years, determined by the Companys Compensation Committee at the time the options are granted or the stock purchase rights are awarded. Options may be
granted under the 2004 Plan for up to 10 years after the grant date, but will terminate upon termination of service, if sooner. Any unvested shares, subject to restricted purchase rights, will become subject to repurchase by the Company in the event
of a termination of employment or service of the holder of the stock purchase right. A total of 400,000 shares were authorized for issuance under the 2004 Plan.



We continue to account for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, under which no compensation cost for stock options is recognized in the accompanying financial statements for stock option or stock purchase awards granted at or above fair market value. If a
determination had been made, in accordance with SFAS No. 123, Accounting for Stock-Based Compensation, of the compensation expense attributable to the options or stock purchase rights that have been granted under the Companys
1999 and 2004 Plans based upon their respective fair value as of their grant date the Companys net income and income per share would have been reduced to the pro forma amounts indicated below:



|                                                                                                                                            |  |                                 |            |                                |   |            |  |      |            |  |   |           
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ---------- | ------------------------------ | - | ---------- |  | ---- | ---------- |  | - | ----------
|                                                                                                                                            |  | Three Months EndedSeptember 30, |            | Nine Months EndedSeptember 30,
|(Dollars in thousands, except per share data)                                                                                               |  | 2005                            |            | 2004                           |   | 2005       |  | 2004
|Net Income:                                                                                                                                 |  |                                 |            |                                |   |            |  |      |            |  |   |           
|As reported                                                                                                                                 |  | $                               | 1,483      |                                | $ | 1482       |  | $    | 4,087      |  | $ | 3,207     
|Deduct: Total stock-based employee compensation expense determined under Fair value based method for all awards, net of related tax
effects |  |                                 | 107        |                                |   | 150        |  |      | 372        |  |   | 446       
|                                                                                                                                            |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Pro forma                                                                                                                                   |  | $                               | 1,376      |                                | $ | 1,332      |  | $    | 3,715      |  | $ | 2,761     
|                                                                                                                                            |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Income per share as reported:                                                                                                               |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Basic                                                                                                                                       |  | $                               | 0.14       |                                | $ | 0.15       |  | $    | 0.40       |  | $ | 0.32      
|Diluted                                                                                                                                     |  |                                 | 0.14       |                                |   | 0.14       |  |      | 0.38       |  |   | 0.30      
|Income per share pro forma:                                                                                                                 |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Basic                                                                                                                                       |  | $                               | 0.14       |                                | $ | 0.13       |  | $    | 0.37       |  | $ | 0.27      
|Diluted                                                                                                                                     |  |                                 | 0.13       |                                |   | 0.13       |  |      | 0.35       |  |   | 0.26      
|Weighted Average Number of Shares:                                                                                                          |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Basic                                                                                                                                       |  |                                 | 10,175,505 |                                |   | 10,082,248 |  |      | 10,149,525 |  |   | 10,081,690
|Diluted                                                                                                                                     |  |                                 | 10,648,392 |                                |   | 10,551,854 |  |      | 10,582,888 |  |   | 10,524,578



The fair values of the
options that were outstanding under the 1999 and 2004 Plans were estimated as of their respective dates of grant using the Black-Scholes option-pricing model. The following table summarizes the weighted average assumptions used for grants in the
following periods:



|                             |  |                                 |   |  |                                |   |  |         |   |  |         |  
|---------------------------- |  | ------------------------------- | - |  | ------------------------------ | - |  | ------- | - |  | ------- | -
|                             |  | Three Months EndedSeptember 30, |   |  | Nine Months EndedSeptember 30, |  
|Assumptions with respect to: |  | 2005                            |   |  | 2004                           |   |  | 2005    |   |  | 2004    |  
|Expected volatility          |  | 40.78                           | % |  | 51.61                          | % |  | 45.84   | % |  | 56.66   | %
|Risk-free interest rate      |  | 4.03                            | % |  | 3.68                           | % |  | 3.72    | % |  | 3.04    | %
|Expected dividend yield      |  | 1.04                            | % |  | 1.22                           | % |  | 1.04    | % |  | 1.22    | %
|Expected life of the option  |  | 5 years                         |   |  | 5 years                        |   |  | 5 years |   |  | 5 years |  



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.-)



|2. | Significant Accounting Policies (Cont.-)
|-- | ----------------------------------------



Comprehensive Income



Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income.
Although certain changes in assets and liabilities, such as unrealized gains and losses on securities available for sale, are reported as a separate component of the equity section of the balance sheet net of income taxes, such items, along with net
income, are components of comprehensive income.



Recent
Accounting Pronouncements



In December 2004, the FASB
issued Statement of Financial Accounting Standards (SFAS) No. 123, (revised 2004), Share-Based Payment. SFAS No. 123R, which supersedes Accounting Principle Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees. SFAS No. 123R requires entities that grant stock options and shares to employees to recognize the fair values of those options and shares as compensation over their respective service
(vesting) periods in their financial statements. Pro forma disclosure of those fair values will no longer be permitted. The costs of the equity instruments is to be measured based on their fair values on the respective dates on which those
instruments are granted and are required to be recognized over the respective periods during which the employees are required to provide services in exchange for the equity instruments. No compensation cost is recognized for equity instruments for
which employees do not render the requisite service. SFAS No. 123R becomes applicable for public companies beginning in the first quarter of fiscal years ending after June 15, 2005, which in our case will be January 1, 2006.



In May 2005, the FASB issued FASB Statement No. 154,
Accounting Changes and Error Corrections (SFAS No. 154). SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It requires, unless impracticable,
retrospective application for reporting changes in accounting principle in the absence of explicit transition requirements specific to this newly adopted accounting principle. SFAS No. 154 is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. We do not expect the adoption of SFAS No. 154 to have a material impact on our financial condition or operating results.



Reclassifications



Certain amounts in the accompanying 2004 consolidated financial statements,
including amounts related to discontinued business, have been reclassified to conform to 2005 presentation.



Commitments and Contingencies



To meet the financing needs of its customers in the normal course of business, the Company is party to financial instruments with off-balance sheet risk.
These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated financial
statements. At September 30, 2005, the Company was committed to fund loans totaling approximately $155 million. The contractual amount of a credit-related financial instrument such as a commitment to extend credit, a credit-card arrangement or
a letter of credit represents the amounts of potential accounting loss should the contract be fully drawn upon, the customer default, and the value of any existing collateral securing the contract become worthless.



The Company uses the same credit policies in making commitments to extend
credit and conditional obligations as it does for on-balance sheet instruments. Commitments generally have fixed expiration dates; however, since many of the commitments are expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Company evaluates each customers creditworthiness on a case-by-case basis, using the same credit underwriting standards that are employed in making commercial loans. The amount of
collateral obtained, if deemed necessary by the Company upon an extension of credit, is based on managements credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, property, plant and
equipment, real estate and income-producing commercial properties.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.-)



|2. | Significant Accounting Policies (Cont.-)
|-- | ----------------------------------------



In the ordinary course of business, we are subject to legal actions normally associated with
financial institutions. At September 30, 2005, we were not a party to any pending legal action that is expected to be material to our consolidated financial condition or results of operations.



Discontinued Business



In the second quarter this year, we decided to discontinue our wholesale
mortgage lending business and to focus our capital and other resources on the growth of its commercial banking business. As a result, our commercial banking and retail brokerage businesses comprise our continuing operations with commercial banking
the only reportable business segment; while the wholesale mortgage lending business has been classified as discontinued operations. We are in the process of winding down the operations of the wholesale mortgage lending business and expect to
complete our exit from that business by the end of the fourth quarter of 2005.



The operating results of the discontinued wholesale mortgage lending business included in the accompanying consolidated statements of income are as follows:



|                                                                |  |                    |      |                   |                   |   |                   |  |   |                   |   |  |   |    
|--------------------------------------------------------------- |  | ------------------ | ---- | ----------------- | ----------------- | - | ----------------- |  | - | ----------------- | - |  | - | ---
|                                                                |  | Three Months Ended |      | Nine Months Ended
|                                                                |  | September 30,2005  |      |                   | September 30,2004 |   | September 30,2005 |  |   | September 30,2004
|                                                                |  | (In thousands)    
|Income (loss) from discontinued operations, before income taxes |  | $                  | (357 | )                 |                   | $ | 180               |  | $ | (849              | ) |  | $ | 448
|Income tax (expense) benefit                                    |  |                    | (146 | )                 |                   |   | 72                |  |   | (348              | ) |  |   | 182
|                                                                |  |                    |      |                   |                   |   |                   |  |   |                   |   |  |   |    
|(Loss) income from discontinued operations, net of taxes(1)     |  | $                  | (211 | )                 |                   | $ | 108               |  | $ | (501              | ) |  | $ | 266
|                                                                |  |                    |      |                   |                   |   |                   |  |   |                   |   |  |   |    

---

|(1) | Contributing to the losses, before taxes, incurred by discontinued operations in the nine
months ended September 30, 2005, were charges aggregating $104,000 that were attributable to severance payments and write downs in the carrying value of software used in that business.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of September 30, 2005 and December 31, 2004, loans held for sale
by the wholesale mortgage lending division totaled $828,000 and $42 million, respectively.



9



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##### Table of Contents

|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------



OVERVIEW



Pacific Mercantile Bancorp is a bank holding company that owns all of the stock of Pacific Mercantile Bank (the Bank), which is a commercial
bank that provides a full range of banking services to small and medium-size businesses and to professionals and the general public in Orange, Los Angeles, San Bernardino and San Diego counties, in Southern California. Substantially all of our
operations are conducted and substantially all of our assets are owned by the Bank, which accounts for substantially all of our consolidated revenues and operating costs.



The following discussion presents information about our consolidated results of operations for the three and nine month
periods ended September 30, 2005 and 2004 and our consolidated financial condition, liquidity and capital resources at September 30, 2005 and should be read in conjunction with our consolidated financial statements and the notes thereto
included elsewhere in this Report.



Additionally, except where
otherwise noted, the following discussion of our results of operation and financial condition relates almost entirely to the results of operations and the assets and liabilities of our continuing operations, which consist primarily of the provision
of commercial banking services and excludes our discontinued wholesale mortgage lending business, which is in the process of being wound down. See Note 2 of the Notes to our Consolidated Financial Statements included elsewhere in this Report for
further information relating to our discontinued operations.



Forward-Looking Information



Statements
contained in this Report that are not historical facts or that discuss our expectations or beliefs regarding our future operations or future financial performance, or financial or other trends in our business, constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements can be identified by the fact that they do not
relate strictly to historical or current facts. Often, they include the words believe, expect, anticipate, intend, plan, estimate, project, or words of similar
meaning, or future or conditional verbs such as will, would, should, could, or may. The information contained in such forward-looking statements is based on current information and
assumptions about future events over which we do not have control and our business is subject to a number of risks and uncertainties that could cause our financial condition or actual operating results in the future to differ significantly from our
expected financial condition or operating results that are set forth in those statements. Those risks and uncertainties are described in this Section of this Report, including in the subsection below entitled Risks and Uncertainties That Could
Affect Our Future Financial Performance and readers of this Report are urged to read this Section in its entirety, including that subsection.



Critical Accounting Policies



Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (GAAP) and
general practices in the banking industry. The accounting policy we follow in determining the sufficiency of our allowance for loan losses we consider to be a critical accounting policy.



Allowance for Loan Losses. The accounting policies and practices we follow in determining the sufficiency of the
allowance we establish for possible loan losses require us to make judgments and assumptions about economic and market conditions and trends that can affect the ability of our borrowers to meet their loan payment obligations. Accordingly, we use
historical loss factors, adjusted for current economic market conditions and other economic indicators, to determine the losses inherent in our loan portfolio and the sufficiency of our allowance for loan losses. If, however, unanticipated changes
were to occur in those conditions or trends, actual loan losses could be greater than that predicted by those loss factors and our current assessments of current conditions and economic trends. In such an event, it would be necessary for us to
increase the allowance for loan losses by means of a charge to income referred to in our financial statements as the provision for loan losses. Such an increase would reduce the carrying value of our loans on our balance sheet, and the
additional provision for loan losses taken



10



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##### Table of Contents

to increase that allowance would reduce our income, in the period when it is determined that an increase in the allowance for loan losses is necessary. See
the discussion in the subsections below entitled Provision for Loan Losses and Allowance for Loan Losses and Nonperforming Loans below.



Discontinued Business



In June 2005, we decided to exit the wholesale mortgage banking business in order to concentrate our capital and management
resources on expanding our commercial banking business. This decision was based on a number of factors, which included the steady growth achieved in, and the opportunities to further expand, our commercial lending business; increases in the costs of
operations of the wholesale mortgage banking business and, therefore, the prospect that, by exiting that business, we could be able to improve the efficiency of our operations; an anticipated increase in the variability of the period-to-period
operating results of the wholesale mortgage banking business, which would make it more difficult to achieve consistency and predictability in our results of operations; and the amount of capital that would be required to grow and improve the
profitability of the wholesale mortgage banking business, particularly in the face of the changing interest rate and market environment. The wholesale mortgage loan operations are in the process of being wound down and we expect to complete our exit
from that business by the end of the fourth quarter of 2005.



Overview of Operating Results in the Three and Nine Months Ended September 30, 2005



The following table sets forth information regarding the interest income that we generated, the interest expense that we incurred, our net interest
income, noninterest income, noninterest expense, and our net income and net income per share for the three and nine months ended September 30, 2005 and 2004.



|                                          |  |                                              |            |   |                                 |   |               |  |        |             |  |   |             |   |               |   |            |  |        |   
|----------------------------------------- |  | -------------------------------------------- | ---------- | - | ------------------------------- | - | ------------- |  | ------ | ----------- |  | - | ----------- | - | ------------- | - | ---------- |  | ------ | --
|                                          |  | Three Months Ended September 30,             |            |   | Nine Months Ended September 30, |  
|                                          |  | 2005Amounts                                  |            |   | 2004Amounts                     |   | PercentChange |  |        | 2005Amounts |  |   | 2004Amounts |   | PercentChange |  
|                                          |  | (Unaudited)                                  |            |   |                                 |   | (Unaudited)   |  |        |            
|                                          |  | (Dollars in thousands except per share data) |           
|Interest income                           |  | $                                            | 12,146     |   |                                 | $ | 8,769         |  | 38.5   | %           |  | $ | 32,601      |   |               | $ | 24,198     |  | 34.7   | % 
|Interest expense                          |  |                                              | 4,583      |   |                                 |   | 2,981         |  | 53.7   | %           |  |   | 11,852      |   |               |   | 8,520      |  | 39.1   | % 
|                                          |  |                                              |            |   |                                 |   |               |  |        |             |  |   |             |   |               |   |            |  |        |   
|Net interest income                       |  | $                                            | 7,563      |   |                                 | $ | 5,788         |  | 30.7   | %           |  | $ | 20,749      |   |               | $ | 15,678     |  | 32.3   | % 
|Noninterest income                        |  | $                                            | 461        |   |                                 | $ | 561           |  | (17.8  | )%          |  | $ | 1,371       |   |               | $ | 1,636      |  | (16.2  | )%
|Noninterest expense                       |  | $                                            | 4,826      |   |                                 | $ | 3,951         |  | 22.1   | %           |  | $ | 13,646      |   |               | $ | 11,388     |  | 19.8   | % 
|Income from continuing business(1)        |  | $                                            | 1,694      |   |                                 | $ | 1,374         |  | 23.3   | %           |  | $ | 4,588       |   |               | $ | 2,941      |  | 56.0   | % 
|Income from discontinued business(1)      |  | $                                            | (211       | ) |                                 | $ | 108           |  | (295.4 | )%          |  | $ | (501        | ) |               | $ | 266        |  | (288.3 | )%
|Net income                                |  | $                                            | 1,483      |   |                                 | $ | 1,482         |  | 0.1    | %           |  | $ | 4,087       |   |               | $ | 3,207      |  | 27.4   | % 
|Net income per sharediluted              |  |                                              |            |   |                                 |   |               |  |        |             |  |   |             |   |               |   |            |  |        |   
|Income from continuing operations         |  | $                                            | 0.16       |   |                                 | $ | 0.13          |  | 23.1   | %           |  | $ | 0.43        |   |               | $ | 0.28       |  | 53.6   | % 
|Income from discontinued operations       |  | $                                            | (0.02      | ) |                                 | $ | 0.01          |  | (300.0 | )%          |  | $ | (0.05       | ) |               | $ | 0.02       |  | (350.0 | )%
|Net income per sharediluted              |  | $                                            | 0.14       |   |                                 | $ | 0.14          |  | NM     |             |  | $ | 0.38        |   |               | $ | 0.30       |  | 26.7   | % 
|Weighted average number of diluted shares |  |                                              | 10,648,392 |   |                                 |   | 10,551,854    |  | 0.9    | %           |  |   | 10,582,888  |   |               |   | 10,524,578 |  | 0.6    | % 

---

|(1) | Net of taxes
|--- | ------------



Key Factors Affecting Operating Results in the Three and Nine Months Ended September 30, 2005



| |  |  | Increase in Net Interest Income. The increases in net interest income of 31% and 32% in the three and nine month periods ended September 30, 2005, respectively, were
primarily the result of growth in the volume of our loans (loans exclusive of those held for sale). Core loans grew by $110 million, or 23%, to $590 million at September 30, 2005 from $480 million at September 30, 2004.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Improvement in Net Interest Margin. Net interest margin improved to 3.42% and 3.35%, respectively, in the three and nine month periods ended September 30, 2005, from
3.17% and 2.99%, respectively, in the corresponding three and nine month periods of 2004. This improvement was due largely to (i) the increase in the volume of core loans, which generated higher yields than our other earning assets, and
(ii) an increase in the yield on federal funds sold for the three and nine month periods ended September 30, 2005, which improved to 3.30% and 2.81%, respectively, from 2.13% and 1.15%, respectively in like periods of 2004, as a result of
the Federal Reserve Board (FRB) increases in the overnight funds rates, aggregating 2.75% over the past 15 months.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Decreases in Noninterest Income. The 18% decrease in noninterest income in the third quarter this year, as compared to the same quarter of last year, was primarily due to the
fact that noninterest income in the third quarter of 2004 benefited from a net gain on the sale of other real estate owned in that quarter. The 16% decrease in noninterest income in the nine months ended September 30, 2005, was primarily
attributable to a decline during the first quarter this year, as compared to the first quarter of 2004, in gains on sale of securities available for sale (consisting primarily of mortgage backed securities), coupled with the aforementioned decline
in gains on sale of other real estate owned in this years third quarter.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increase in Noninterest Expense; Improvement in Efficiency Ratios. The increases in noninterest expense in the three and nine month periods of 2005, as compared to the same
periods of 2004, were primarily attributable to the September 2004 opening of, and the subsequent growth of our commercial banking business at, our Long Beach Financial Center and the opening of our new Ontario Financial Center in June of 2005,
along with the addition of lending personnel primarily at our other Southern California Financial Centers. However, the increases in net interest income in those same three and nine month periods, more than offset the growth in operating expenses
and as a result, our efficiency ratios (operating expenses as a percentage of total revenues) in the third quarter and nine months ended September 30, 2005 improved to 60% and 62%, respectively, from 62% and 66%, respectively, in the same three
and nine month periods of 2004.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Set forth below
are certain key financial performance ratios and other financial data from continuing operations for the periods indicated:



|                                          |  |                                |   |  |                               |   |  |      |   |  |      |  
|----------------------------------------- |  | ------------------------------ | - |  | ----------------------------- | - |  | ---- | - |  | ---- | -
|                                          |  | Three MonthsEndedSeptember 30, |   |  | Nine MonthsEndedSeptember 30, |  
|                                          |  | 2005                           |   |  | 2004                          |   |  | 2005 |   |  | 2004 |  
|                                          |  | (Unaudited)                    |   |  | (Unaudited)                   |  
|Return on average assets(1)               |  | 0.72                           | % |  | 0.69                          | % |  | 0.69 | % |  | 0.51 | %
|Return on average shareholders equity(1) |  | 8.66                           | % |  | 7.55                          | % |  | 8.00 | % |  | 5.48 | %
|Net interest margin(2)                    |  | 3.42                           | % |  | 3.17                          | % |  | 3.35 | % |  | 2.99 | %

---

|(1) | Annualized.
|--- | -----------



|(2) | Net interest income expressed as a percentage of total average interest earning assets.
|--- | ---------------------------------------------------------------------------------------



Results of Operations



Net Interest Income



One of the principal determinants of a banks income is its net
interest income, which is the difference between (i) the interest that a bank earns on loans, investment securities and other interest earning assets, on the one hand, and (ii) its interest expense, which consists primarily of the interest
it must pay to attract and retain deposits and the interest that it pays on borrowings and other interest-bearing liabilities, on the other hand. A banks interest income and interest expense are, in turn, affected by a number of factors, some
of which are outside of its control, including national and local economic conditions and the FRBs monetary policies, which affect interest rates, the demand for loans, and the ability of borrowers to meet their loan payment obligations.



12



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##### Table of Contents

The following table sets forth our interest income, interest expense, net interest income (in thousands of dollars) and
net interest margin from continuing operations in the three and nine month periods ended September 30, 2005 and 2004, respectively:



|                                             |  |                                 |        |   |                                |   |       |               |  |      |            |  |   |            |   |  |               |        |   |  |      |  
|-------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ----- | ------------- |  | ---- | ---------- |  | - | ---------- | - |  | ------------- | ------ | - |  | ---- | -
|                                             |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|(Dollars in thousands except per share data) |  | 2005Amount                      |        |   | 2004Amount                     |   |       | PercentChange |  |      | 2005Amount |  |   | 2004Amount |   |  | PercentChange |       
|                                             |  | (Unaudited)                     |        |   |                                |   |       | (Unaudited)   |  |      |            | 
|Interest income                              |  | $                               | 12,146 |   |                                | $ | 8,769 |               |  | 38.5 | %          |  | $ | 32,601     |   |  | $             | 24,198 |   |  | 34.7 | %
|Interest expense                             |  |                                 | 4,583  |   |                                |   | 2,981 |               |  | 53.7 | %          |  |   | 11,852     |   |  |               | 8,520  |   |  | 39.1 | %
|                                             |  |                                 |        |   |                                |   |       |               |  |      |            |  |   |            |   |  |               |        |   |  |      |  
|Net interest income                          |  | $                               | 7,563  |   |                                | $ | 5,788 |               |  | 30.7 | %          |  | $ | 20,749     |   |  | $             | 15,678 |   |  | 32.3 | %
|Net interest margin                          |  |                                 | 3.42   | % |                                |   | 3.17  | %             |  |      |            |  |   | 3.35       | % |  |               | 2.99   | % |  |      |  



As the table above
indicates, our net interest income increased by $1.8 million, or 31%, in the third quarter of 2005, and by $5.0 million, or 32%, in the nine months ended September 30, 2005, as compared to the same respective periods of 2004. Those increases
were primarily attributable to increases in interest income of $3.3 million, or 39%, and $8.4 million, or 35%, respectively, in the three and nine month periods of 2005, as compared to the same periods of 2004. By contrast, our interest expense
increased $1.6 million, or 54%, and $3.4 million, or 39%, respectively in the three and nine months periods ended September 30, 2005 over the corresponding periods of 2004.



The increases in interest income in the three and nine month periods ended September 30, 2005, were primarily
attributable to (i) an increase in the volume of average interest earning assets, including increases of $132 million and $121 million, respectively, in the average volume of outstanding loans (exclusive of mortgages held for sale) over the
corresponding periods of 2004, and (ii) to a lesser extent, the increase in market rates of interest over the last 15 months.



The increases in interest expense in the third quarter and nine months ended September 30, 2005, as compared to the same respective periods last
year, were primarily attributable to increases of $98 million and $85 million in the average volume of interest bearing liabilities and the rise in market rates of interest rates subsequent to June 2004, which required us to increase the interest we
pay to attract and retain deposits and led to increases in interest rates on our outstanding borrowings.



Our net interest margin improved to 3.42% in the third quarter of 2005 from 3.17% in the same quarter of 2004, and to 3.35% in the nine months ended
September 30, 2005, from 2.99% in the same nine months of 2004. In the three months ended September 30, 2005 the yield on interest earning assets improved to 5.54%, while the average rate of interest paid on our interest bearing
liabilities increased to 2.93%, as compared to a yield on interest earning assets of 4.78% and an average rate of interest paid on interest bearing liabilities of 2.24%, in the same three months of 2004. In the nine months ended June 2005, the yield
on interest earning assets improved to 5.31%, and the average rate of interest paid on our interest bearing liabilities increased to 2.71%, as compared to a yield on interest earning assets of 4.58%, and an average rate of interest paid of 2.19%, in
the same nine months of 2004.



This improvement in the average
yield on interest earning assets was due primarily to the substantial increase in the volume of loans on which we generate greater yields than on our other interest earning assets and, to a lesser extent, the increase in interest rates over the past
15 months.



The following table sets forth changes in interest
income, including loan fees, and interest paid in the three and nine month periods ended September 30, 2005, as compared to the same respective periods in 2004 and the extent to which those



13



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##### Table of Contents

changes were attributable to changes in the volume and rates of interest earned on interest earning assets and interest paid on interest-bearing liabilities.



|                                        |  |                                                                        |       |                                                                       |   |       |  |           |       |  |         |       |       |  |   |       |  |   |       |  
|--------------------------------------- |  | ---------------------------------------------------------------------- | ----- | --------------------------------------------------------------------- | - | ----- |  | --------- | ----- |  | ------- | ----- | ----- |  | - | ----- |  | - | ----- | -
|                                        |  | Three Months EndedSeptember 30,2005 vs 2004Increase (decrease) due to: |       | Nine Months EndedSeptember 30,2005 vs 2004Increase (decrease) due to: |  
|                                        |  | Volume(1)                                                              |       | Rate(1)                                                               |   | Total |  | Volume(1) |       |  | Rate(1) |       | Total | 
|                                        |  | (Unaudited)                                                            |       | (Unaudited)                                                           |  
|                                        |  | (Dollars in thousands)                                                 |       | (Dollars in thousands)                                                |  
|Interest income:                        |  |                                                                        |       |                                                                       |   |       |  |           |       |  |         |       |       |  |   |       |  |   |       |  
|Short-term investments(2)               |  | $                                                                      | 178   |                                                                       | $ | 79    |  | $         | 257   |  | $       | 131   |       |  | $ | 574   |  | $ | 705   |  
|Securities available for sale and stock |  |                                                                        | 61    |                                                                       |   | 189   |  |           | 250   |  |         | (825  | )     |  |   | 769   |  |   | (56   | )
|Loans                                   |  |                                                                        | 1,563 |                                                                       |   | 1,248 |  |           | 2,811 |  |         | 5,853 |       |  |   | 2,255 |  |   | 8,108 |  
|                                        |  |                                                                        |       |                                                                       |   |       |  |           |       |  |         |       |       |  |   |       |  |   |       |  
|Total earning assets                    |  |                                                                        | 1,802 |                                                                       |   | 1,516 |  |           | 3,318 |  |         | 5,159 |       |  |   | 3,598 |  |   | 8,757 |  
|Interest expense:                       |  |                                                                        |       |                                                                       |   |       |  |           |       |  |         |       |       |  |   |       |  |   |       |  
|Interest-bearing checking accounts      |  |                                                                        | 3     |                                                                       |   | 14    |  |           | 17    |  |         | 6     |       |  |   | 41    |  |   | 47    |  
|Money market and savings accounts       |  |                                                                        | 71    |                                                                       |   | 49    |  |           | 120   |  |         | 155   |       |  |   | 523   |  |   | 678   |  
|Certificates of deposit                 |  |                                                                        | 118   |                                                                       |   | 600   |  |           | 718   |  |         | 159   |       |  |   | 890   |  |   | 1,049 |  
|Borrowings                              |  |                                                                        | 324   |                                                                       |   | 279   |  |           | 603   |  |         | 969   |       |  |   | 214   |  |   | 1,183 |  
|Junior subordinated debentures          |  |                                                                        | 169   |                                                                       |   | 51    |  |           | 220   |  |         | 356   |       |  |   | 470   |  |   | 826   |  
|                                        |  |                                                                        |       |                                                                       |   |       |  |           |       |  |         |       |       |  |   |       |  |   |       |  
|Total interest-bearing liabilities      |  |                                                                        | 685   |                                                                       |   | 993   |  |           | 1,678 |  |         | 1,645 |       |  |   | 2,138 |  |   | 3,783 |  
|                                        |  |                                                                        |       |                                                                       |   |       |  |           |       |  |         |       |       |  |   |       |  |   |       |  
|Net interest income                     |  | $                                                                      | 1,117 |                                                                       | $ | 523   |  | $         | 1,640 |  | $       | 3,514 |       |  | $ | 1,460 |  | $ | 4,974 |  
|                                        |  |                                                                        |       |                                                                       |   |       |  |           |       |  |         |       |       |  |   |       |  |   |       |  

---

|(1) | Changes in interest earned and interest paid due to changes in the mix of interest earning
assets and interest bearing liabilities have been allocated to the change due to volume and the change due to interest rates in proportion to the relationship of the absolute dollar amounts of the changes in each.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Short-term investments consist of federal funds sold and interest bearing deposits with
financial institutions.
|--- | ---------------------------------------------------------------------------------------------------------------



The above table
indicates that the increases of $1.6 million and $5.0 million, respectively, in our net interest income in the three and nine month periods ended September 30, 2005, as compared to the like periods in 2004, were the result of increases of $1.1
million and $3.5 million, respectively, in volume variance and of $523,000 and $1.5 million, respectively, in interest rate variance, for the three and nine month periods ended September 30, 2005, as compared to the same periods in 2004. The
increases in the volume variance reflect the increases in average earning assets of $132 million and $121 million, respectively, and in average interest-bearing liabilities of $98 million and $85 million, respectively, in the three and nine month
periods ended September 30, 2005, as compared to the corresponding periods of 2004. The increases in the rate variance reflect the increases in interest rates earned on average earning assets of 76 basis points and 73 basis points,
respectively, offset by increases in interest rates paid on average interest-bearing liabilities of 69 basis points and 52 basis points, respectively, in the three and nine month periods ended September 30, 2005, as compared to the
corresponding periods of 2004.



Provision for Loan Losses



Like virtually all banks and other financial
institutions, we follow the practice of maintaining a reserve or allowance (the Allowance) for possible loan losses that occur from time to time as an incidental part of the banking business. When it is determined that the payment in
full of a loan has become unlikely, the carrying value of the loan is reduced to what management believes is its realizable value. This reduction, which is referred to as a loan charge-off, or write-down is charged against
the Allowance. The amount of the Allowance is increased periodically (i) to replenish the Allowance after it has been reduced due to loan charge-offs, (ii) to reflect changes in the volume of outstanding loans, and (iii) to take
account of changes in the risk of potential losses due to a deterioration in the condition of borrowers or in the value of property securing nonperforming loans or changes in economic conditions. See Financial
ConditionAllowance for Loan Losses and Nonperforming Loans below in this Section of this Report. Increases in the Allowance for



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##### Table of Contents

Loan Losses are made through a charge, recorded as an expense in the statement of income referred to as the provision for loan losses. Recoveries
of loans previously charged-off are added back to the Allowance and, therefore, have the effect of increasing the Allowance for Loan Losses and reducing the amount of the provision that might otherwise be made to replenish or increase the Allowance.



Although we employ economic models that are based on bank
regulatory guidelines, industry standards and historical loss experience to evaluate and determine the sufficiency of the Allowance for Loan Losses and, thereby, the amount of the provisions required to be made for potential loan losses, those
determinations involve judgments about trends in current economic conditions and other events that can affect the ability of borrowers to meet their loan obligations. The duration and effects of current economic trends are subject to a number of
uncertainties and changes that are outside of our ability to control. See the discussion below in this Section under the caption Risks and Uncertainties That Could Affect our Future Financial Performance  we could incur losses on the
loans we make. If changes in economic or market conditions or unexpected subsequent events were to occur, it could become necessary to incur additional charges to increase the Allowance, which would have the effect of reducing our income or
causing us to incur losses.



In addition, the Federal Reserve
Board and the California Department of Financial Institutions, as an integral part of their examination processes, periodically review the adequacy of our Allowance for Loan Losses. These agencies may require us to make additional provisions, over
and above the provisions that we have already made, the effect of which would be to reduce our income.



Noninterest Income



Noninterest income consists primarily of fees charged for services provided by the bank on deposit accounts and commissions earned on securities brokerage
services.



The following table identifies the components of and
the percentage changes in noninterest income in the three and nine month periods ended September 30, 2005, as compared to the same respective periods of 2004.



|                                                    |  |                                  |     |                                 |                                 |     |                        |       |                                 |  |   |       |  |   |       |  |       |   
|--------------------------------------------------- |  | -------------------------------- | --- | ------------------------------- | ------------------------------- | --- | ---------------------- | ----- | ------------------------------- |  | - | ----- |  | - | ----- |  | ----- | --
|                                                    |  | Three Months Ended September 30, |     |                                 | Nine Months Ended September 30, |    
|                                                    |  | Amount                           |     | Percentage Change 2005 vs. 2004 |                                 |     | Amount                 |       | Percentage Change 2005 vs. 2004 | 
|                                                    |  | 2005                             |     | 2004                            |                                 |     | 2005                   |       | 2004                            | 
|                                                    |  | Unaudited                        |     |                                 |                                 |     | Unaudited              |       |                                 | 
|                                                    |  | (Dollars in thousands)           |     |                                 |                                 |     | (Dollars in thousands) |       |                                 | 
|Service fees on deposits                            |  | $                                | 164 |                                 | $                               | 181 |                        | (9.4  | )%                              |  | $ | 502   |  | $ | 521   |  | (3.6  | )%
|Net gains on sales of securities available for sale |  |                                  |    |                                 |                                 |    |                        | N/M   |                                 |  |   |      |  |   | 369   |  | N/M   |   
|Brokerage commissions                               |  |                                  | 235 |                                 |                                 | 179 |                        | 31.3  | %                               |  |   | 554   |  |   | 383   |  | 44.6  | % 
|Net gains on sale of other real estate owned        |  |                                  |    |                                 |                                 | 117 |                        | N/M   |                                 |  |   |      |  |   | 117   |  | N/M   |   
|Other                                               |  |                                  | 62  |                                 |                                 | 84  |                        | (26.2 | )%                              |  |   | 315   |  |   | 246   |  | 28.1  | % 
|                                                    |  |                                  |     |                                 |                                 |     |                        |       |                                 |  |   |       |  |   |       |  |       |   
|Total noninterest income                            |  | $                                | 461 |                                 | $                               | 561 |                        | (17.8 | )%                              |  | $ | 1,371 |  | $ | 1,636 |  | (16.2 | )%
|                                                    |  |                                  |     |                                 |                                 |     |                        |       |                                 |  |   |       |  |   |       |  |       |   



Noninterest income
decreased by $100,000, or 18%, in the third quarter of 2005, as compared to the same quarter in 2004, primarily due to the fact that we realized an $117,000 gain on sale of other real estate owned in the third quarter of 2004, whereas we had no
sales of other real estate owned in this years third quarter. The resulting decrease, coupled with reductions in service fees on deposits and in other noninterest income, was partially offset by an increase in commissions earned on securities
brokerage services in the third quarter of 2005, as compared to the same quarter of 2004. In the nine months ended September 30, 2005, noninterest income declined by $265,000, or 16%, as compared to the like period of 2004, due primarily to the
fact that noninterest income in the nine months ended September 30, 2004 included $369,000 of gains from sales of securities and the aforementioned $117,000 of gain from the sale of other real estate owned; whereas there were no sales of, and
hence no gains from, sales of securities or other real estate owned in the nine months ended September 30, 2005.



15



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##### Table of Contents

Noninterest Expense



The following table compares the amounts (in thousands of dollars) of the principal components of noninterest expense in the
three and nine months periods ended September 30, 2005 to the same three and nine month periods of 2004.



|                               |  |                                  |       |                                 |                                 |       |                        |       |                                 |  |   |        |  |   |        |  |       |   
|------------------------------ |  | -------------------------------- | ----- | ------------------------------- | ------------------------------- | ----- | ---------------------- | ----- | ------------------------------- |  | - | ------ |  | - | ------ |  | ----- | --
|                               |  | Three Months Ended September 30, |       |                                 | Nine Months Ended September 30, |      
|                               |  | Amount                           |       | Percentage Change 2005 vs. 2004 |                                 |       | Amount                 |       | Percentage Change 2005 vs. 2004 | 
|                               |  | 2005                             |       | 2004                            |                                 |       | 2005                   |       | 2004                            | 
|                               |  | Unaudited                        |       |                                 |                                 |       | Unaudited              |       |                                 | 
|                               |  | (Dollars in thousands)           |       |                                 |                                 |       | (Dollars in thousands) |       |                                 | 
|Salaries and employee benefits |  | $                                | 2,506 |                                 | $                               | 2,024 |                        | 23.8  | %                               |  | $ | 7,168  |  | $ | 5,697  |  | 25.8  | % 
|Occupancy                      |  |                                  | 654   |                                 |                                 | 527   |                        | 24.1  | %                               |  |   | 1,785  |  |   | 1,543  |  | 15.7  | % 
|Equipment and depreciation     |  |                                  | 455   |                                 |                                 | 308   |                        | 47.7  | %                               |  |   | 1,198  |  |   | 995    |  | 20.4  | % 
|Data processing                |  |                                  | 137   |                                 |                                 | 141   |                        | (2.8  | )%                              |  |   | 376    |  |   | 463    |  | (18.8 | )%
|Professional fees              |  |                                  | 367   |                                 |                                 | 165   |                        | 122.4 | %                               |  |   | 892    |  |   | 590    |  | 51.2  | % 
|Other operating expense(1)     |  |                                  | 707   |                                 |                                 | 786   |                        | (10.1 | )%                              |  |   | 2,227  |  |   | 2,100  |  | 6.0   | % 
|                               |  |                                  |       |                                 |                                 |       |                        |       |                                 |  |   |        |  |   |        |  |       |   
|Total noninterest expense      |  | $                                | 4,826 |                                 | $                               | 3,951 |                        | 22.1  | %                               |  | $ | 13,646 |  | $ | 11,388 |  | 19.8  | % 
|                               |  |                                  |       |                                 |                                 |       |                        |       |                                 |  |   |        |  |   |        |  |       |   

---

|(1) | Other operating expense primarily consists of telephone, stationery and office supplies,
regulatory expenses, investor relations, insurance premiums, postage, and correspondent bank fees.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Noninterest expense increased by $875,000, or 22%, in the quarter ended September 30, 2005 and by $2.3 million, or 20%, in the nine months ended
September 30, 2005, as compared to the respective corresponding periods of 2004. These increases were primarily the result of expenses attributable to the September 2004 opening of, and the subsequent growth of our commercial banking business
at, our Long Beach Financial Center and the opening of our new Ontario Financial Center in June of 2005, along with the addition of experienced lending personnel for our Southern California Financial Centers and our Corporate Banking Division.



A measure of our ability to control noninterest expense in
relation to the level of our net revenue (net interest income plus noninterest income) is our efficiency ratio, which is the ratio of noninterest expense to net revenue. As a general rule, all other things being equal, a lower efficiency ratio
indicates an ability to generate increased revenue without a commensurate increase in the staffing and equipment and third party services and, therefore, would indicate greater efficiencies in our operations. However, a banks efficiency ratio
can be adversely affected by factors such as the opening of new banking offices, the revenues of which usually lag behind the expenses that a bank must incur to staff and open the new offices.



Notwithstanding the increase in the dollar amounts of our noninterest expense
in the third quarter and nine months ended September 30, 2005, as compared to the like periods of last year, we were able to improve our efficiency ratio from continuing operations in the quarter and nine months ended September 30, 2005,
to 60% and 62%, respectively, from 62% and 66%, respectively, in the same three and nine month periods of 2004, due primarily to the increases we generated in net interest income.



We anticipate that noninterest expense also will be higher during the fourth quarter of this year, as compared to the same
quarter of 2004, due primarily to the expansion of our banking franchise resulting from the growth of our Long Beach Financial Center, the opening of our Ontario Financial Center and the expansion of our lending staff.



Asset/Liability Management



The primary objective of asset/liability management is to reduce our
exposure to interest rate fluctuations, which can affect our net interest margins and, therefore, our net interest income and net earnings. We seek to achieve this objective by matching interest rate sensitive assets and liabilities, and maintaining
the maturities and the repricing of these assets and liabilities at appropriate levels in response to the changes in the interest rate environment. Generally, if rate sensitive assets exceed rate sensitive liabilities, net interest income will be
positively impacted during a rising interest rate environment and negatively impacted during a declining interest rate environment. When rate sensitive liabilities exceed rate sensitive assets, net interest income generally will be positively
impacted during a declining interest rate environment and negatively impacted during a rising interest rate environment. However, because interest rates for different asset and liability products offered by depository institutions respond
differently to changes in the interest rate environment, the relationship or gap between interest sensitive assets and interest sensitive liabilities is only a general indicator of interest rate sensitivity and how our net interest
income might be affected by changing rates of interest.



16



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##### Table of Contents

For example, rates on certain assets or liabilities typically lag behind changes in market rates of
interest. Additionally, prepayments of loans and securities available for sale, and early withdrawals of certificates of deposit, could cause the interest sensitivities to vary.



The table below sets forth information concerning our rate sensitive assets and liabilities at September 30, 2005. The
assets and liabilities are classified by the earlier of maturity or repricing dates in accordance with their contractual terms. As is described above, certain shortcomings are inherent in the method of analysis presented in this table.



|                                                          |  |                        |         |     |                                  |   |          |                                  |  |   |                 |   |  |                        |         |   |       |   |          |   |  |   |        
|--------------------------------------------------------- |  | ---------------------- | ------- | --- | -------------------------------- | - | -------- | -------------------------------- |  | - | --------------- | - |  | ---------------------- | ------- | - | ----- | - | -------- | - |  | - | -------
|                                                          |  | Three Months or Less   |         |     | Over Three Through Twelve Months |   |          | Over One Year Through Five Years |  |   | Over Five Years |   |  | Non- Interest- Bearing |         |   | Total
|                                                          |  | Unaudited             
|                                                          |  | (Dollars in thousands)
|Assets                                                    |  |                        |         |     |                                  |   |          |                                  |  |   |                 |   |  |                        |         |   |       |   |          |   |  |   |        
|Interest-bearing deposits in other financial institutions |  | $                      | 426     |     |                                  | $ |         |                                  |  | $ |                |   |  | $                      |        |   |       | $ |         |   |  | $ | 426    
|Investment in unconsolidated trust subsidiaries           |  |                        |        |     |                                  | $ |         |                                  |  | $ |                |   |  | $                      |        |   |       | $ | 837      |   |  |   | 837    
|Securities available for sale                             |  |                        | 17,018  |     |                                  |   | 44,111   |                                  |  |   | 122,264         |   |  |                        | 55,149  |   |       |   |         |   |  |   | 238,542
|Federal Reserve Bank and Federal Home Loan Bank stock     |  |                        | 12,217  |     |                                  |   |         |                                  |  |   |                |   |  |                        |        |   |       |   |         |   |  |   | 12,217 
|Federal funds sold                                        |  |                        | 40,000  |     |                                  |   |         |                                  |  |   |                |   |  |                        |        |   |       |   |         |   |  |   | 40,000 
|Loans, gross                                              |  |                        | 269,341 |     |                                  |   | 56,364   |                                  |  |   | 234,205         |   |  |                        | 35,925  |   |       |   |         |   |  |   | 595,835
|Non-interest earning assets, net                          |  |                        |        |     |                                  |   |         |                                  |  |   |                |   |  |                        |        |   |       |   | 45,572   |   |  |   | 45,572 
|                                                          |  |                        |         |     |                                  |   |          |                                  |  |   |                 |   |  |                        |         |   |       |   |          |   |  |   |        
|Total assets                                              |  | $                      | 339,002 |     |                                  | $ | 100,475  |                                  |  | $ | 356,469         |   |  | $                      | 91,074  |   |       | $ | 46,409   |   |  | $ | 933,429
|                                                          |  |                        |         |     |                                  |   |          |                                  |  |   |                 |   |  |                        |         |   |       |   |          |   |  |   |        
|Liabilities and Shareholders Equity                       |  |                        |         |     |                                  |   |          |                                  |  |   |                 |   |  |                        |         |   |       |   |          |   |  |   |        
|Noninterest-bearing deposits                              |  | $                      |        |     |                                  | $ |         |                                  |  | $ |                |   |  | $                      |        |   |       | $ | 191,131  |   |  | $ | 191,131
|Interest-bearing deposits                                 |  |                        | 214,063 | (1) |                                  |   | 110,262  | (2)                              |  |   | 47,040          |   |  |                        |        |   |       |   |         |   |  |   | 371,365
|Borrowings                                                |  |                        | 63,706  |     |                                  |   | 147,000  |                                  |  |   | 49,000          |   |  |                        |        |   |       |   |         |   |  |   | 259,706
|Junior subordinated debentures                            |  |                        | 22,682  |     |                                  |   | 5,155    |                                  |  |   |                |   |  |                        |        |   |       |   |         |   |  |   | 27,837 
|Other liabilities                                         |  |                        |        |     |                                  |   |         |                                  |  |   |                |   |  |                        |        |   |       |   | 5,270    |   |  |   | 5,270  
|Shareholders equity                                      |  |                        |        |     |                                  |   |         |                                  |  |   |                |   |  |                        |        |   |       |   | 78,120   |   |  |   | 78,120 
|                                                          |  |                        |         |     |                                  |   |          |                                  |  |   |                 |   |  |                        |         |   |       |   |          |   |  |   |        
|Total liabilities and shareholders equity                 |  | $                      | 300,451 |     |                                  | $ | 262,417  |                                  |  | $ | 96,040          |   |  | $                      | 0       |   |       | $ | 274,521  |   |  | $ | 933,429
|                                                          |  |                        |         |     |                                  |   |          |                                  |  |   |                 |   |  |                        |         |   |       |   |          |   |  |   |        
|Interest rate sensitivity gap                             |  | $                      | 38,551  |     |                                  | $ | (161,942 | )                                |  | $ | 260,429         |   |  | $                      | 91,074  |   |       | $ | (228,112 | ) |  |   |        
|                                                          |  |                        |         |     |                                  |   |          |                                  |  |   |                 |   |  |                        |         |   |       |   |          |   |  |   |        
|Cumulative interest rate sensitivity gap                  |  | $                      | 38,551  |     |                                  | $ | (123,391 | )                                |  | $ | 137,038         |   |  | $                      | 228,112 |   |       | $ |         |   |  |   |        
|                                                          |  |                        |         |     |                                  |   |          |                                  |  |   |                 |   |  |                        |         |   |       |   |          |   |  |   |        
|Cumulative % of rate sensitive assets in maturity period  |  |                        | 36      | %   |                                  |   | 47       | %                                |  |   | 85              | % |  |                        | 95      | % |       |   | 100      | % |  |   |        
|                                                          |  |                        |         |     |                                  |   |          |                                  |  |   |                 |   |  |                        |         |   |       |   |          |   |  |   |        
|Rate sensitive assets to rate sensitive liabilities       |  |                        | 113     | %   |                                  |   | 38       | %                                |  |   | 371             | % |  |                        | N/A     |   |       |   | N/A      |   |  |   |        
|                                                          |  |                        |         |     |                                  |   |          |                                  |  |   |                 |   |  |                        |         |   |       |   |          |   |  |   |        
|Cumulative ratio                                          |  |                        | 113     | %   |                                  |   | 78       | %                                |  |   | 121             | % |  |                        | 135     | % |       |   | N/A      |   |  |   |        
|                                                          |  |                        |         |     |                                  |   |          |                                  |  |   |                 |   |  |                        |         |   |       |   |          |   |  |   |        

---

|1 | Net of Bancorps money market demand account of $21.7 million and certificate of deposit
of $5.0 million
|- | --------------------------------------------------------------------------------------------------------



|2 | Net of Bancorps certificate of deposit of $250,000
|- | ---------------------------------------------------



17



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##### Table of Contents

At September 30, 2005, our rate sensitive balance sheet was shown to be in a negative twelve-month
gap position. This would imply that our net interest margin would decrease in the shortterm if interest rates rise and would increase in the short-term if interest rates were to fall. However, as noted above, the extent to which our net
interest margin will be impacted by changes in prevailing interests rates will depend on a number of factors, including how quickly rate sensitive assets and liabilities react to interest rate changes, the mix of our interest earning assets (loans
versus other lower yielding interest earning assets, such as securities) and the mix of our interest bearing deposits (between for example, lower interest core deposits and higher cost time certificates of deposit) and our other interest bearing
liabilities.



Financial Condition



Assets



Our total consolidated assets increased by $87 million, or 10%, to $933
million at September 30, 2005 from $846 million at December 31, 2004, primarily as a result of increases in loan volume. Those increases were funded by increases in deposits and in borrowings.



The following table sets forth the composition of our interest earning assets
at:



|                                                               |  |                    |         |                   |   |        
|-------------------------------------------------------------- |  | ------------------ | ------- | ----------------- | - | -------
|                                                               |  | September 30, 2005 |         | December 31, 2004
|                                                               |  | Unaudited          |         |                  
|                                                               |  | (In thousands)    
|Federal funds sold                                             |  | $                  | 40,000  |                   | $ | 69,600 
|Interest-bearing deposits with financial institutions          |  |                    | 426     |                   |   | 738    
|Federal Reserve Bank and Federal Home Loan Bank Stock, at cost |  |                    | 12,217  |                   |   | 10,662 
|Securities available for sale, at fair value                   |  |                    | 238,542 |                   |   | 169,412
|Loans (net of allowances of $4,690 and $4,032, respectively)   |  |                    | 590,317 |                   |   | 511,827
|Loans held for sale, at fair value(1)                          |  |                    | 828     |                   |   | 42,348 

---

|(1) | Loans held for sale comprise substantially all of the assets of our discontinued wholesale
mortgage lending operations.
|--- | -----------------------------------------------------------------------------------------------------------------------



Loans



The following table sets forth the composition, by
loan category, of our loan portfolio, excluding mortgage loans held for sale, at September 30, 2005 and December 31, 2004:



|                                 |  |                        |         |   |                   |       |   |        |   |         |         |  |       |  
|-------------------------------- |  | ---------------------- | ------- | - | ----------------- | ----- | - | ------ | - | ------- | ------- |  | ----- | -
|                                 |  | September 30, 2005     |         |   | December 31, 2004 |      
|                                 |  | Amount                 |         |   | Percent           |       |   | Amount |   |         | Percent | 
|                                 |  | Unaudited              |         |   |                   |       |   |        |  
|                                 |  | (Dollars in thousands) |        
|Commercial loans                 |  | $                      | 148,879 |   |                   | 25.0  | % |        | $ | 132,964 |         |  | 25.8  | %
|Real estate loans                |  |                        | 230,910 |   |                   | 38.8  | % |        |   | 174,520 |         |  | 33.7  | %
|Residential mortgage loans       |  |                        | 173,653 |   |                   | 29.2  | % |        |   | 173,194 |         |  | 33.6  | %
|Construction loans               |  |                        | 39,279  |   |                   | 6.6   | % |        |   | 29,731  |         |  | 5.8   | %
|Consumer loans                   |  |                        | 2,438   |   |                   | 0.4   | % |        |   | 5,471   |         |  | 1.1   | %
|                                 |  |                        |         |   |                   |       |   |        |   |         |         |  |       |  
|Gross loans                      |  |                        | 595,159 |   |                   | 100.0 | % |        |   | 515,880 |         |  | 100.0 | %
|                                 |  |                        |         |   |                   |       |   |        |   |         |         |  |       |  
|Deferred fee (income) costs, net |  |                        | (152    | ) |                   |       |   |        |   | (21     | )       |  |       |  
|Allowance for loan losses        |  |                        | (4,690  | ) |                   |       |   |        |   | (4,032  | )       |  |       |  
|                                 |  |                        |         |   |                   |       |   |        |   |         |         |  |       |  
|Loans, net                       |  | $                      | 590,317 |   |                   |       |   |        | $ | 511,827 |         |  |       |  
|                                 |  |                        |         |   |                   |       |   |        |   |         |         |  |       |  



Commercial loans are
loans to businesses to finance capital purchases or improvements, or to provide cash flow for operations. Real estate and residential mortgage loans are loans secured by trust deeds on real property, including commercial property and single family
and multi-family residences. Construction loans are interim loans to finance specific construction projects. Consumer loans include installment loans to consumers.



18



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##### Table of Contents

The following tables set forth the maturity distribution of our loan portfolio (excluding consumer and
residential mortgage loans and mortgage loans held for sale) at September 30, 2005:



|                                      |  |                        |         |                                  |   |                 |  |       |         |  |   |        
|------------------------------------- |  | ---------------------- | ------- | -------------------------------- | - | --------------- |  | ----- | ------- |  | - | -------
|                                      |  | September 30, 2005    
|                                      |  | One Year or Less       |         | Over One Year Through Five Years |   | Over Five Years |  | Total
|                                      |  | Unaudited             
|                                      |  | (Dollars in thousands)
|Real estate and construction loans(1) |  |                        |         |                                  |   |                 |  |       |         |  |   |        
|Floating rate                         |  | $                      | 54,334  |                                  | $ | 43,180          |  | $     | 147,006 |  | $ | 244,520
|Fixed rate                            |  |                        | 1,218   |                                  |   | 18,107          |  |       | 6,344   |  |   | 25,669 
|Commercial loans                      |  |                        |         |                                  |   |                 |  |       |         |  |   |        
|Floating rate                         |  |                        | 90,195  |                                  |   | 24,299          |  |       | 8,835   |  |   | 123,329
|Fixed rate                            |  |                        | 6,625   |                                  |   | 17,854          |  |       | 1,071   |  |   | 25,550 
|                                      |  |                        |         |                                  |   |                 |  |       |         |  |   |        
|Total                                 |  | $                      | 152,372 |                                  | $ | 103,440         |  | $     | 163,256 |  | $ | 419,068
|                                      |  |                        |         |                                  |   |                 |  |       |         |  |   |        

---

|(1) | Does not include mortgage loans on single and multi-family residences and consumer loans,
which totaled $173.7 million and $2.4 million, respectively, at September 30, 2005.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Allowance for Loan Losses and Nonperforming Loans



Allowance for Loan Losses. The allowance for loan losses (the Allowance) at September 30, 2005 was $4.7 million, which
represented approximately 0.79% of the loans outstanding at September 30, 2005, as compared to $4.0 million, or 0.78%, of the loans outstanding at December 31, 2004, in each case exclusive of loans held for sale.



We carefully monitor changing economic conditions, the loan portfolio by
category, the financial condition of borrowers, the history of the loan portfolio, and we follow bank regulatory guidelines in determining the adequacy of the Allowance. We believe that the Allowance at September 30, 2005 was adequate to
provide for losses inherent in the loan portfolio. However, as the volume of loans increases, additional provisions for loan losses will be required to maintain the Allowance at adequate levels. Additionally, the Allowance was established on the
basis of assumptions and judgments regarding such matters as economic conditions and trends and the condition of borrowers, historical industry loan loss data and regulatory guidelines, and actual loan losses in the future could vary from the losses
predicted on the basis of those assumptions, judgments and guidelines. For example, if economic conditions were to deteriorate, or interest rates were to increase significantly, which would have the effect of increasing the risk that borrowers would
encounter difficulties meeting their loan payment obligations, it could become necessary to increase the Allowance by means of additional provisions for loan losses. See Results of OperationsProvision for Loan Losses above.



Set forth below is a summary of the transactions in the
allowance for loan losses for the nine months ended September 30, 2005 and the year ended December 31, 2004:



|                             |  |                   |       |   |                  |   |       |  
|---------------------------- |  | ----------------- | ----- | - | ---------------- | - | ----- | -
|                             |  | September 30,2005 |       |   | December 31,2004 |  
|                             |  | Unaudited         |       |   |                  |  
|                             |  | (In thousands)    |      
|Balance, beginning of period |  | $                 | 4,032 |   |                  | $ | 3,943 |  
|Provision for loan losses    |  |                   | 690   |   |                  |   | 973   |  
|Amounts charged off          |  |                   | (32   | ) |                  |   | (884  | )
|                             |  |                   |       |   |                  |   |       |  
|Balance, end of period       |  | $                 | 4,690 |   |                  | $ | 4,032 |  
|                             |  |                   |       |   |                  |   |       |  



The $884,000 loan
charge off during fiscal year ended December 31, 2004, primarily represents one loan that had been fully reserved for in the Allowance at December 31, 2003.



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##### Table of Contents

Non-Performing Loans. We also measure and establish reserves for loan impairments on a
loan-by-loan basis using either the present value of expected future cash flows discounted at a loans effective interest rate, or the fair value of the collateral if the loan is collateral-dependent. We exclude from our impairment calculations
smaller, homogeneous loans such as consumer installment loans and lines of credit. Also, loans that experience insignificant payment delays or shortfalls are generally not considered impaired. We cease accruing interest, and therefore classify as
nonaccrual, any loan as to which principal or interest has been in default for a period of 90 days or more, or if repayment in full of interest or principal is not expected.



At September 30, 2005 and December 31, 2004, we had $1.4 million and $11,000, respectively, of fully
collateralized loans that were delinquent 90 days or more and which were classified as a nonaccrual and impaired loans. We had no loans delinquent 90 days or more with principal still accruing interest or any restructured loans at September 30,
2005 or December 31, 2004. At September 30, 2005, our average investment in impaired loans, on a year-to-date basis, was $895,000. The interest that we would have earned in the nine months ended September 30, 2005, had the impaired
loans remained current in accordance with their original terms was $52,000.



Loans Held for Sale



Loans held for sale in the secondary market, which consist primarily of mortgage loans originated by our wholesale mortgage lending business, totaled $828,000 at September 30, 2005, a decrease of $41 million from $42 million at
December 31, 2004. Loans held for sale are carried at the lower of cost or estimated fair value in the aggregate except for those designated as fair value hedges, which are carried at fair value. There were $828,000 of loans held for sale
designated as fair value hedges at September 30, 2005, and there were no ineffective hedges. Net unrealized losses on loans held for sale, if any, are recognized through a valuation allowance by charges to income. As of September 30, 2005,
we had a valuation allowance of approximately $12,000 representing net unrealized losses related to these loans held for sale.



As previously disclosed, our wholesale mortgage lending business, which originated these loans held for sale, is being wound down and is classified in the
accompanying financial statements as discontinued operations. We expect to have exited that business by the end of the fourth quarter of the current year, by which time all the remaining loans held for sale will have been sold or transferred to the
commercial loan portfolio at the lower of cost or market.



Deposits



Average Balances of and
Average Interest Rates Paid on Deposits. Set forth below are the average amounts (in thousands of dollars) of, and the average rates paid on, deposits for the nine months ended September 30, 2005:



|                                    |  |                                     |         |             |      |  
|----------------------------------- |  | ----------------------------------- | ------- | ----------- | ---- | -
|                                    |  | Nine Months EndedSeptember 30, 2005 |        
|                                    |  | Unaudited                           |        
|                                    |  | AverageBalance                      |         | AverageRate |     
|                                    |  | (Dollars in thousands)              |        
|Noninterest-bearing demand deposits |  | $                                   | 194,567 |             |     |  
|Interest-bearing checking accounts  |  |                                     | 22,336  |             | 0.56 | %
|Money market and savings deposits   |  |                                     | 137,506 |             | 1.73 | %
|Time deposits                       |  |                                     | 208,710 |             | 3.14 | %
|                                    |  |                                     |         |             |      |  
|Total deposits                      |  | $                                   | 563,119 |             | 1.61 | %
|                                    |  |                                     |         |             |      |  



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##### Table of Contents

Deposit Totals. Deposits totaled $562 million at September 30, 2005 as compared to $534
million at December 31, 2004. At September 30, 2005, noninterest-bearing deposits totaled $191 million and represented 34% of total deposits, as compared to $175 million and 33% of total deposits at December 31, 2004. At
September 30, 2005, certificates of deposit in denominations of $100,000 or more totaled $119 million and represented 21% of total deposits, as compared to $99 million and 19% of total deposits at December 31, 2004. Set forth below is a
maturity schedule of domestic time certificates of deposit outstanding at September 30, 2005:



|                                     |  |                                     |        |                                          |   |        
|------------------------------------ |  | ----------------------------------- | ------ | ---------------------------------------- | - | -------
|                                     |  | At September 30, 2005              
|                                     |  | Certificatesof DepositUnder$100,000 |        | Certificatesof Depositof $100,000or More
|                                     |  | Unaudited                          
|                                     |  | (In thousands)                     
|Maturities                           |  |                                     |        |                                          |   |        
|Three months or less                 |  | $                                   | 21,851 |                                          | $ | 33,264 
|Over three and through twelve months |  |                                     | 46,115 |                                          |   | 64,398 
|Over twelve months                   |  |                                     | 25,551 |                                          |   | 21,489 
|                                     |  |                                     |        |                                          |   |        
|Total certificates of deposit        |  | $                                   | 93,517 |                                          | $ | 119,151
|                                     |  |                                     |        |                                          |   |        



Liquidity



We actively manage our liquidity needs to ensure that sufficient funds are
available to meet the ongoing needs of our customers. We project the future sources and uses of funds and maintain sufficient liquid funds for unanticipated events. Our primary sources of cash include payments on loans, and the sale or maturity of
investments and growth in deposits. The primary uses of cash include funding new loans and making advances on existing lines of credit, purchasing investments, including securities available for sale, funding deposit withdrawals and paying operating
expenses. We maintain funds in overnight federal funds and other short-term investments to provide for short-term liquidity needs. We also have obtained credit lines from the Federal Home Loan Bank and other financial institutions to meet any
additional liquidity requirements.



Cash flow Provided by
Financing Activities. Cash flow of $84 million was provided by financing activities during the nine months ended September 30, 2005, the source of which consisted primarily of net increases of $29 million in deposits and $55 million in net
borrowings.



Cash flow From Operating Activities. Cash
flow of $9 million was provided by our continuing operations, while the activities of our discontinued mortgage lending operations provided an additional $41 million of cash during the nine months ended September 30, 2005.



Cash flow Used in Investing. In the nine months ended
September 30, 2005, we used cash flow of $153 million in investing activities, primarily to fund an increase of $79 million in loans and $121 million of purchases of investment securities available for sale, partially offset by $47 million of
proceeds from principal payments received on investment securities available for sale.



Our liquid assets, which included cash and due from banks, federal funds sold, interest earning deposits with financial institutions and unpledged securities available for sale (excluding Federal Reserve Bank and
Federal Home Loan Bank stock) totaled $149 million or 16% of total assets at September 30, 2005.



The relationship between gross loans and total deposits provides a useful measure of our liquidity. Since repayment of loans tends to be less predictable
than the maturity of investments and other liquid resources, the higher the loan-to-deposit ratio the less liquid are our assets. On the other hand, since we realize greater yields and higher interest income on loans than we do on investments, a
lower loan-to-deposit ratio can adversely affect interest income and earnings. As a result, our goal is to achieve a loan-to-deposit ratio that appropriately balances the requirements of liquidity and the need to generate a fair return on assets. At
September 30, 2005, the ratio of loans-to-deposits (excluding loans held for sale) was 105%, compared to 96% at December 31, 2004. Even through our loans-to-deposits ratio was 105%, the Company maintained adequate liquidity supported by
Federal Home Loan Bank advances and securities sold under agreement to repurchase.



21



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Off Balance Sheet Arrangements



Loan Commitments and Standby Letters of Credit. In order to meet the financing needs of our customers in the normal
course of business, we make commitments to extend credit and issue standby commercial letters of credit to or for our customers. At September 30, 2005 and December 31, 2004, we were committed to fund certain loans (inclusive of mortgages
held for sale) amounting to approximately $155 million and $167 million, respectively.



Commitments to extend credit and standby letters of credit generally have fixed expiration dates or other termination clauses and the customer may be required to pay a fee and meet other conditions in order to draw on
those commitments or standby letters of credit. We expect, based on historical experience, that many of the commitments will expire without being drawn upon and, therefore, the total commitment amounts do not necessarily represent future cash
requirements.



To varying degrees, commitments to extend credit
involve elements of credit and interest rate risk for us that are in excess of the amounts recognized in our balance sheets. Our maximum exposure to credit loss in the event of nonperformance by the customers to whom such commitments are made is
equal to the amount of those commitments. As a result, before making such a commitment to a customer, we evaluate the customers creditworthiness using the same underwriting standards that we would apply if we were approving loans to the
customer. In addition, we often require the customer to secure its payment obligations for amounts drawn on such commitments with collateral such as accounts receivable, inventory, property, plant and equipment, income-producing commercial
properties, residential properties and properties under construction. As a consequence, our exposure to credit and interest rate risk on such commitments is not different in character or amount than risks inherent in the outstanding loans in our
loan portfolio.



Standby letters of credit are conditional
commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers.



We believe that our cash and cash equivalent resources, together with
available borrowings under our credit facilities, will be sufficient to enable us to meet any increases in demand for loans or in the utilization of outstanding loan commitments or standby letters of credit and any increase in deposit withdrawals
that might occur in the foreseeable future.



Contractual Obligations



Borrowings. As of September 30, 2005, we had
$49 million of outstanding long-term borrowings and $174 million of outstanding short-term borrowings that we had obtained from the Federal Home Loan Bank. The table below sets forth the



22



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##### Table of Contents

amounts (in thousands of dollars) of, the interest rates we pay on, and the maturity dates of these Federal Home Loan Bank borrowings. These borrowings,
along with the securities sold under agreements to repurchase, have a weighted-average annualized interest rate of 3.07%.



|                       |  |               |   |  |                   |  |                        |  |               |   |  |                   
|---------------------- |  | ------------- | - |  | ----------------- |  | ---------------------- |  | ------------- | - |  | ------------------
|Principal Amounts      |  | Interest Rate |   |  | Maturity Dates    |  | Principal Amounts      |  | Interest Rate |   |  | Maturity Dates    
|(Dollars in thousands) |  |               |   |  |                   |  | (Dollars in thousands) |  |               |   |  |                   
|5,000                  |  | 2.34          | % |  | October 13, 2005  |  | 5,000                  |  | 3.13          | % |  | June 19, 2006     
|7,000                  |  | 2.34          | % |  | November 14, 2005 |  | 5,000                  |  | 3.78          | % |  | July 10, 2006     
|5,000                  |  | 2.35          | % |  | November 14, 2005 |  | 7,000                  |  | 3.72          | % |  | July 10, 2006     
|5,000                  |  | 2.33          | % |  | November 17, 2005 |  | 5,000                  |  | 2.76          | % |  | August 9, 2006    
|5,000                  |  | 2.33          | % |  | November 21, 2005 |  | 7,000                  |  | 4.19          | % |  | August 10, 2006   
|7,000                  |  | 2.41          | % |  | January 9, 2006   |  | 5,000                  |  | 4.13          | % |  | August 15, 2006   
|6,000                  |  | 1.94          | % |  | January 23, 2006  |  | 2,000                  |  | 2.94          | % |  | August 28, 2006   
|10,000                 |  | 2.74          | % |  | January 30, 2006  |  | 3,000                  |  | 2.56          | % |  | September 18, 2006
|5,000                  |  | 2.66          | % |  | February 2, 2006  |  | 3,000                  |  | 2.49          | % |  | September 25, 2006
|7,000                  |  | 3.18          | % |  | February 3, 2006  |  | 5,000                  |  | 2.39          | % |  | October 2, 2006   
|5,000                  |  | 2.00          | % |  | February 13, 2006 |  | 2,000                  |  | 2.40          | % |  | October 2, 2006   
|5,000                  |  | 2.50          | % |  | February 21, 2006 |  | 7,000                  |  | 3.18          | % |  | November 22, 2006 
|6,000                  |  | 2.34          | % |  | February 28, 2006 |  | 5,000                  |  | 2.69          | % |  | December 12, 2006 
|10,000                 |  | 4.14          | % |  | March 10, 2006    |  | 5,000                  |  | 2.67          | % |  | December 18, 2006 
|5,000                  |  | 3.50          | % |  | March 16, 2006    |  | 4,000                  |  | 2.50          | % |  | January 22, 2007  
|5,000                  |  | 4.18          | % |  | April 10, 2006    |  | 5,000                  |  | 2.57          | % |  | February 12, 2007 
|5,000                  |  | 3.26          | % |  | April 10, 2006    |  | 5,000                  |  | 3.62          | % |  | May 18, 2007      
|7,000                  |  | 3.59          | % |  | May 1,2006        |  | 3,000                  |  | 3.14          | % |  | September 18, 2007
|5,000                  |  | 4.21          | % |  | May 10, 2006      |  | 2,000                  |  | 3.06          | % |  | September 24, 2007
|5,000                  |  | 3.87          | % |  | May 18, 2006      |  | 1,000                  |  | 2.91          | % |  | October 1, 2007   
|7,000                  |  | 3.62          | % |  | June 7, 2006      |  | 5,000                  |  | 3.45          | % |  | February 11, 2009 
|5,000                  |  | 3.63          | % |  | June 9, 2006      |  |                        |  |               |   |  |                   



At September 30,
2005, U.S. Agency and Mortgage Backed securities, U.S. Government agency securities and collateralized mortgage obligations with an aggregate fair market value of $166 million and $101 million of residential mortgage and other real estate secured
loans were pledged to secure these Federal Home Loan Bank borrowings, repurchase agreements, local agency deposits, and Treasury, Tax and Loan accounts.



The highest amount of borrowings outstanding at any month end during the nine months ended September 30, 2005 consisted of $223 million of borrowings
from the Federal Home Loan Bank and $37 million of overnight borrowings in the form of securities sold under repurchase agreements. During 2004, the highest amount of borrowings outstanding at any month end consisted of $191 million of advances from
the Federal Home Loan Bank and $17 million of overnight borrowings in the form of securities sold under repurchase agreements.



Junior Subordinated Debentures. Pursuant to rulings of the Federal Reserve Board, bank holding companies have been permitted to issue long term
subordinated debt instruments that will, subject to certain conditions, qualify as and, therefore, augment capital for regulatory purposes. Pursuant to those rulings, in 2002, we formed subsidiary grantor trusts to sell and issue to institutional
investors a total of $17 million principal amount of floating junior trust preferred securities (trust preferred securities). We received the net proceeds from the sale of the trust preferred securities in exchange for our issuance to
the grantor trusts, of a total $17 million principal amount of our junior subordinated floating rate debentures (the Debentures), the payment terms of which mirror those of the trust preferred securities. In October 2004, we established
another grantor trust that sold an additional $10 million of trust preferred securities to an institutional investor and, in connection therewith, we sold and issued an additional $10 million principal amount of junior subordinated floating rate
debentures in exchange for the proceeds raised from the sale of those trust preferred securities. The payments that we make of interest and principal on the Debentures are used by the grantor trusts to make the payments that come due to the holders
of the trust preferred securities pursuant to the terms of those securities.



23



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Set forth below is certain information regarding the terms of the Debentures that were outstanding as of
September 30, 2005:



|                     |  |                  |        |               |                      |               |               
|-------------------- |  | ---------------- | ------ | ------------- | -------------------- | ------------- | --------------
|Original Issue Dates |  | Principal Amount |        | Interest Rate |                      | Maturity Date
|                     |  | (In thousands)   |        |               |                      |              
|June 2002            |  | $                | 5,155  |               | LIBOR plus 3.75%(1)  |               | June 2032     
|August 2002          |  | $                | 5,155  |               | LIBOR plus 3.625%(2) |               | August 2032   
|September 2002       |  | $                | 7,217  |               | LIBOR plus 3.40%(1)  |               | September 2032
|October 2004         |  | $                | 10,310 |               | LIBOR plus 2.00%(1)  |               | October 2034  
|                     |  |                  |        |               |                      |               |               
|Total                |  | $                | 27,837 |               |                      |               |               
|                     |  |                  |        |               |                      |               |               

---

|(1) | Interest rate resets quarterly.
|--- | -------------------------------



|(2) | Interest rate resets semi-annually.
|--- | -----------------------------------



These Debentures have quarterly or semi-annual interest payments, which may
be deferred until the first redeemable date, and are redeemable at our option beginning 5 years after their respective original issue dates.



Under the Federal Reserve Board rulings, the borrowings evidenced by the Debentures, which are subordinated to all of our other borrowings that are
outstanding or which we may obtain in the future, are eligible (subject to certain dollar limitations) to qualify and, at September 30, 2005, $26.8 million of those Debentures qualified as Tier I capital, for regulatory purposes. The remaining
$1.0 million qualified as Tier II capital for regulatory purposes. See discussion below under the subcaption Regulatory Capital Requirements.



Investment Policy and Securities Available for Sale



Our investment policy is designed to provide for our liquidity needs and to generate a favorable return on investments without undue interest rate risk,
credit risk or asset concentrations.



Our investment policy:



| |  |  | authorizes us to invest in obligations issued or fully guaranteed by the United States Government, certain federal agency obligations, time deposits issued by federally insured
depository institutions, municipal securities and in federal funds sold;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provides that the weighted average maturities of U.S. Government obligations and federal agency securities cannot exceed 10 years and municipal obligations cannot exceed 25 years;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provides that time deposits must be placed with federally insured financial institutions, cannot exceed $100,000 in any one institution and may not have a maturity exceeding 60
months; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | prohibits engaging in securities trading activities.
| | - |  | ----------------------------------------------------



Securities available for sale are those that we intend to hold for an indefinite period of time, but which may be sold in response to changes in liquidity
needs, changes in interest rates, changes in prepayment risks or other similar factors. Such securities are recorded at fair value. Any unrealized gains and losses are reported as Other Comprehensive Income (Loss) rather than included in
or deducted from earnings.



24



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##### Table of Contents

The following is a summary of the major components of securities available for sale and a comparison of
the amortized cost, estimated fair values and gross unrealized gains and losses as of September 30, 2005 and December 31, 2004:



|                                             |  |                        |         |                     |   |                     |  |                    |       |  |   |        
|-------------------------------------------- |  | ---------------------- | ------- | ------------------- | - | ------------------- |  | ------------------ | ----- |  | - | -------
|                                             |  | AmortizedCost          |         | GrossUnrealizedGain |   | GrossUnrealizedLoss |  | EstimatedFairValue
|                                             |  | Unaudited             
|                                             |  | (Dollars in thousands)
|September 30, 2005                           |  |                        |         |                     |   |                     |  |                    |       |  |   |        
|Securities Available For Sale:               |  |                        |         |                     |   |                     |  |                    |       |  |   |        
|Mortgage Backed Securities                   |  | $                      | 211,080 |                     | $ | 17                  |  | $                  | 3,779 |  | $ | 207,318
|Collateralized Mortgage Obligations          |  |                        | 19,988  |                     |   | 0                   |  |                    | 302   |  |   | 19,686 
|                                             |  |                        |         |                     |   |                     |  |                    |       |  |   |        
|Total Government and Agencies Securities     |  |                        | 231,068 |                     |   | 17                  |  |                    | 4,081 |  |   | 227,004
|Municipal Securities                         |  |                        | 10,087  |                     |   | 32                  |  |                    | 75    |  |   | 10,044 
|Mutual Fund                                  |  |                        | 1,494   |                     |   | 0                   |  |                    | 0     |  |   | 1,494  
|                                             |  |                        |         |                     |   |                     |  |                    |       |  |   |        
|Total Securities Available For Sale          |  | $                      | 242,649 |                     | $ | 49                  |  | $                  | 4,156 |  | $ | 238,542
|                                             |  |                        |         |                     |   |                     |  |                    |       |  |   |        
|December 31, 2004                            |  |                        |         |                     |   |                     |  |                    |       |  |   |        
|Securities Available For Sale:               |  |                        |         |                     |   |                     |  |                    |       |  |   |        
|U.S. Agencies and Mortgage Backed Securities |  | $                      | 160,405 |                     | $ | 14                  |  | $                  | 2,383 |  | $ | 158,036
|Collateralized Mortgage Obligations          |  |                        | 10,487  |                     |   | 3                   |  |                    | 122   |  |   | 10,368 
|                                             |  |                        |         |                     |   |                     |  |                    |       |  |   |        
|Total Government and Agencies Securities     |  |                        | 170,892 |                     |   | 17                  |  |                    | 2,505 |  |   | 168,404
|Fannie Mae Trust Preferred Stock             |  |                        | 1,008   |                     |   | 0                   |  |                    | 0     |  |   | 1,008  
|                                             |  |                        |         |                     |   |                     |  |                    |       |  |   |        
|Total Securities Available For Sale          |  | $                      | 171,900 |                     | $ | 17                  |  | $                  | 2,505 |  | $ | 169,412
|                                             |  |                        |         |                     |   |                     |  |                    |       |  |   |        



At September 30,
2005, U.S. Agencies and Mortgage Backed securities, U.S. Government Agency securities and collateralized mortgage obligations with an aggregate fair market value of $166 million were pledged to secure Federal Home Loan Bank borrowings, repurchase
agreements, local agency deposits and Treasury, Tax and Loan accounts.



The amortized cost and estimated fair value, at September 30, 2005, of securities available for sale are shown in the table below by contractual maturities and historical prepayments based on the prior three months of principal
payments. Expected maturities will differ from contractual maturities and historical prepayments, particularly with respect to collateralized mortgage obligations, because borrowers may react to interest rate market conditions differently than the
historical prepayment rates.



|                                                    |  |                 |        |   |                               |   |         |                                |  |   |               |   |  |       |        |   |  |   |         |  
|--------------------------------------------------- |  | --------------- | ------ | - | ----------------------------- | - | ------- | ------------------------------ |  | - | ------------- | - |  | ----- | ------ | - |  | - | ------- | -
|                                                    |  | Maturing in     |       
|(Dollars in thousands)                              |  | One yearor less |        |   | Over oneyearthroughfive years |   |         | Over fiveyearsthroughten years |  |   | Over tenyears |   |  | Total |       
|                                                    |  | Unaudited       |       
|Securities available for sale, amortized cost       |  | $               | 58,474 |   |                               | $ | 112,597 |                                |  | $ | 49,020        |   |  | $     | 22,558 |   |  | $ | 242,649 |  
|Securities available for sale, estimated fair value |  |                 | 57,547 |   |                               |   | 110,533 |                                |  |   | 47,953        |   |  |       | 22,509 |   |  |   | 238,542 |  
|Weighted average yield                              |  |                 | 3.52   | % |                               |   | 3.79    | %                              |  |   | 4.14          | % |  |       | 4.50   | % |  |   | 3.86    | %



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##### Table of Contents

The table below shows as of September 30, 2005, the gross unrealized losses and fair values of our
investments, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.



|                                           |  |                                                          |         |                   |   |           |  |                |         |           |   |                |  |   |         |  |   |      
|------------------------------------------ |  | -------------------------------------------------------- | ------- | ----------------- | - | --------- |  | -------------- | ------- | --------- | - | -------------- |  | - | ------- |  | - | -----
|                                           |  | Securities With Unrealized Loss as of September 30, 2005
|                                           |  | Less than 12 months                                      |         | 12 months or more |   | Total    
|(Dollars In thousands)                     |  | FairValue                                                |         | UnrealizedLoss    |   | FairValue |  | UnrealizedLoss |         | FairValue |   | UnrealizedLoss
|                                           |  | Unaudited                                               
|US Agencies and Mortgage Backed Securities |  | $                                                        | 95,187  |                   | $ | 1,031     |  | $              | 104,507 |           | $ | 2,748          |  | $ | 199,694 |  | $ | 3,779
|Collateralized Mortgage Obligations        |  |                                                          | 15,358  |                   |   | 154       |  |                | 4,328   |           |   | 148            |  |   | 19,686  |  |   | 302  
|Municipal Securities                       |  |                                                          | 5,667   |                   |   | 75        |  |                | 0       |           |   | 0              |  |   | 5,667   |  |   | 75   
|                                           |  |                                                          |         |                   |   |           |  |                |         |           |   |                |  |   |         |  |   |      
|Total Temporarily impaired securities      |  | $                                                        | 116,212 |                   | $ | 1,260     |  | $              | 108,835 |           | $ | 2,896          |  | $ | 225,047 |  | $ | 4,156
|                                           |  |                                                          |         |                   |   |           |  |                |         |           |   |                |  |   |         |  |   |      



We regularly monitor
investments for significant declines in fair value. We have determined that the declines in the fair values of these investments below their amortized costs, as set forth in the table above, are temporary based on the following: (i) those
declines are due to interest rate changes and not due to a deterioration in the creditworthiness of the issuers of those investment securities, and (ii) we have the ability to hold those securities until there is a recovery in their values.



Capital Resources



Capital Regulatory Requirements Applicable to Banking Institutions.
Under federal banking regulations that apply to all United States based bank holding companies and federally insured banks, the Company (on a consolidated basis) and the Bank (on a stand-alone basis) must meet specific capital adequacy requirements
that, for the most part, involve quantitative measures that determine the ratios of their capital to their assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Under those regulations, based
primarily on those quantitative measures each bank holding company and each federally insured bank is determined by its primary federal bank regulatory agency to come within one of the following categories.



| |  |  | well capitalized
| | - |  | ----------------



| |  |  | adequately capitalized
| | - |  | ----------------------



| |  |  | undercapitalized
| | - |  | ----------------



| |  |  | significantly undercapitalized; or
| | - |  | ----------------------------------



| |  |  | critically undercapitalized
| | - |  | ---------------------------



Certain qualitative assessments also are made by a banking institutions primary federal regulatory agency that could lead the agency to determine
that the banking institution should be assigned to a lower capital category than the one indicated by the quantitative measures used to assess the institutions capital adequacy. At each successive lower capital category, a bank and its bank
holding company are subject to greater operating restrictions and increased regulatory supervision by their federal bank regulatory agencies.



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##### Table of Contents

The following table sets forth the amounts of capital and capital ratios of the Company (on a
consolidated basis) and the Bank (on a stand alone basis) at September 30, 2005, as compared to the respective minimum regulatory requirements applicable to them.



|                                        |  |                        |         |       |                          |   |                                           |                                   |        |  |              |        |  |       |        |  |               |  
|--------------------------------------- |  | ---------------------- | ------- | ----- | ------------------------ | - | ----------------------------------------- | --------------------------------- | ------ |  | ------------ | ------ |  | ----- | ------ |  | ------------- | -
|                                        |  |                        |         |       |                          |   | Applicable Federal Regulatory Requirement |                                  
|                                        |  | Actual                 |         |       | Capital AdequacyPurposes |   |                                           | To be Categorized WellCapitalized |       
|                                        |  | Amount                 |         | Ratio |                          |   | Amount                                    |                                   | Ratio  |  |              | Amount |  | Ratio |       
|                                        |  | (Dollars in thousands) |        
|Total Capital to Risk Weighted Assets:  |  |                        |         |       |                          |   |                                           |                                   |        |  |              |        |  |       |        |  |               |  
|Company                                 |  | $                      | 113,111 |       | 16.7                     | % |                                           | $                                 | 54,439 |  | At least 8.0 | %      |  | $     | 68,049 |  | At least 10.0 | %
|Bank                                    |  |                        | 74,740  |       | 11.2                     | % |                                           |                                   | 53,526 |  | At least 8.0 | %      |  |       | 66,907 |  | At least 10.0 | %
|Tier 1 Capital to Risk Weighted Assets: |  |                        |         |       |                          |   |                                           |                                   |        |  |              |        |  |       |        |  |               |  
|Company                                 |  | $                      | 107,446 |       | 15.8                     | % |                                           | $                                 | 27,220 |  | At least 4.0 | %      |  | $     | 40,830 |  | At least 6.0  | %
|Bank                                    |  |                        | 70,087  |       | 10.5                     | % |                                           |                                   | 26,763 |  | At least 4.0 | %      |  |       | 40,144 |  | At least 6.0  | %
|Tier 1 Capital to Average Assets:       |  |                        |         |       |                          |   |                                           |                                   |        |  |              |        |  |       |        |  |               |  
|Company                                 |  | $                      | 107,446 |       | 11.5                     | % |                                           | $                                 | 37,259 |  | At least 4.0 | %      |  | $     | 46,574 |  | At least 5.0  | %
|Bank                                    |  |                        | 70,087  |       | 7.5                      | % |                                           |                                   | 37,247 |  | At least 4.0 | %      |  |       | 46,558 |  | At least 5.0  | %



As of
September 30, 2005, based on applicable capital regulations, the Company (on a consolidated basis) and the Bank (on a stand-alone basis) qualified as well capitalized institutions under the capital adequacy guidelines described above.



Our consolidated total capital and Tier 1 capital of the
Company, at September 30, 2005, include an aggregate of $26.8 million of long term indebtedness evidenced by the Junior Subordinated Debentures that we issued in 2002 and 2004 in connection with the sale of trust preferred securities. The
remaining $1.0 million principal amount of the long-term indebtedness was classified as Tier II capital. See Financial ConditionContractual Obligations above. We contributed $25 million of the net proceeds from the sale of
the trust preferred securities to the Bank, thereby, increasing its total capital and Tier 1 capital.



Dividend Policy and Share Repurchase Program. The Company intends to analyze the cash flow requirements in order to determine if we will pay
dividends in the next three to twelve months.



In July 2005,
our Board of Directors concluded that, at prevailing market prices, the Companys shares represented an attractive investment opportunity and, therefore, that repurchases of Company shares would be a good use of Company funds. As a result, the
Board of Directors approved a share repurchase program, which authorizes Company to purchase up to two percent (2%) of the Companys outstanding common shares, which are approximately 200,000 shares in total. Purchases may be made in the
open market or in private transactions, in accordance with applicable Securities and Exchange Commission rules, when opportunities become available to purchase shares at prices believed to be attractive. The Company is under no obligation to
repurchase shares under the share repurchase program and the timing, actual number and value of shares that are repurchased by the Company under this program will depend on a number of factors, including the Companys future financial
performance and available cash resources, competing uses for its corporate funds, prevailing market prices of its common stock and the number of shares that become available for sale at prices that the Company believes are attractive, as well as any
regulatory requirements applicable to the Company. To date the Company has not purchased any stock under this program.



Risks and Uncertainties That Could Affect Our Future Financial Performance



This Report, including the discussion and analysis of our financial condition and results of operations set forth above, contains certain forward-looking
statements. Forward-looking statements are estimates of, or expectations or beliefs regarding our future financial performance that are based on current information and that are subject to a number of risks and uncertainties that could cause our
actual operating results and financial performance in the future to differ significantly from those expected at the current time. Those risks and uncertainties include, although they are not limited to, the following:



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Risks Related to Our Business



We face intense competition from other banks and financial institutions that could hurt our business



We conduct our business operations in Southern
California, where the banking business is highly competitive and is dominated by a relatively small number of large multi-state banks with offices operating over wide geographical areas. We also compete with other financial service businesses,
mutual fund companies, and securities brokerage and investment banking firms that offer competitive banking and financial products and services. The larger banks, and some of those other financial institutions, have greater resources that enable
them to conduct extensive advertising campaigns and to shift resources to regions or activities of greater potential profitability. Some of these banks and institutions also have substantially more capital and higher lending limits that could enable
them to attract larger clients, and offer financial products and services that we are unable to offer, as a means of also attracting loans and deposits.



Increased competition may prevent us from (i) achieving increases, or could even result in a decrease, in our loan volume or deposit accounts or
(ii) increasing interest rates on loans or reducing interest rates we pay to attract or retain deposits, any of which could cause a decline in interest income or an increase in interest expense, that could cause our net interest income and our
earnings to decline.



Adverse changes in economic
conditions in Southern California could disproportionately harm our business



The large majority of our customers and the properties securing a large proportion of our loans are located in Southern California. A worsening of economic conditions in Southern California could harm our business by:



| |  |  | reducing loan demand which, in turn, would lead to reduced net interest margins and net interest income;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | affecting the financial capability of borrowers to meet their loan obligations which could, in turn, result in increases in loan losses and require increases in provisions made for
possible loan losses, thereby reducing our earnings; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | leading to reductions in real property values that, due to our reliance on real property to secure many of our loans, could make it more difficult for us to prevent losses from
being incurred on non-performing loans through the sale of such real properties.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Additionally, real estate values in California have been increasing rapidly in recent years. In the event that these values are not sustained or other events, such as earthquakes or fires, that may be more prevalent
in Southern California than other geographic areas, cause a decline in real estate values, our collateral coverage for our loans will be reduced and we may suffer increased loan losses.



National economic conditions and changes in Federal Reserve Board monetary policies could affect our operating result.



Our ability to achieve and sustain our profitability
is substantially dependent on our net interest income. Like most banking organizations and other depository institutions, our interest income is affected by a number of factors outside of our control, including changes in market rates of interest,
which in turn are affected by changes in national economic conditions and national monetary policies adopted by the Federal Reserve Board. From 2001 and continuing until June 30, 2003, the Federal Reserve Board followed a policy of reducing
interest rates in an effort to stimulate the national economy. Those interest rate reductions, coupled with sluggishness in the economy, led to decreases in our net interest margin during 2003 and made it more difficult to increase earnings. We
cannot predict whether the improvement in the economy will continue or whether the Federal Reserve Boards recent increases in interest rates, which have totaled 275 basis points since June 2004, will succeed in lessening the downward pressure
on net interest margins that was prevalent through most of the last three years.



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On the other hand, the benefits of increased market rates of interest may be offset, partially or in
whole, because those increases will increase the costs of attracting deposits and obtaining borrowings. If we are unable to effectuate commensurate increases in the rates we are able to charge on existing or new loans due to competitive pressures or
contractual restrictions on our ability to increase interest rates on existing loans, our net interest margin may suffer despite the increase in interest rates. Changes in economic conditions and increasing rates of interest also could cause
prospective borrowers to fail to qualify for our loan products and reduce loan demand, thereby reducing our net interest margins. In addition, if economic conditions were to worsen, that could adversely affect the financial capability of borrowers
to meet their loan obligations, which could result in loan losses and require increases in provisions made for possible loan losses.



Rapid growth could strain our resources and lead to operating problems or inefficiencies



We have grown substantially in the past five years by opening new financial
centers. We intend to continue to evaluate the opening of new financial centers, primarily in Southern California, either by opening new offices or acquiring one or more community banks. The opening of new offices or the acquisition of another bank
will result in increased operating expenses until new banking offices or acquired banking operations attract sufficient business to cover operating expenses, which usually takes at least six to twelve months. There is no assurance, however, as to
how long it would take for new financial centers to begin generating positive cash flow and earnings. Also, we cannot assure that we will be able to adequately manage our growth, which will make substantial demands on the time and attention of
management and on our capital resources. The failure to prepare appropriately and on a timely basis for growth could cause us to experience inefficiencies or failures in our service delivery systems, regulatory problems, and erosion in customer
confidence, unexpected expenses or other problems.



Additionally, acquisitions of banks are extremely time consuming and expensive, and, in the case of bank acquisitions, subject to regulatory control. Expansion through the acquisition of other banks may also have the following consequences:



| |  |  | expenses of any undisclosed or potential legal liabilities of the acquired bank;
| | - |  | --------------------------------------------------------------------------------



| |  |  | costs, delays and difficulties of integrating the acquired banks operations, technologies and personnel into our existing operations, organization and culture;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | possible regulatory agency required divestiture of certain assets; and
| | - |  | ----------------------------------------------------------------------



| |  |  | issuances of equity securities to pay for acquisitions which may be dilutive to existing shareholders.
| | - |  | ------------------------------------------------------------------------------------------------------



We could incur losses on the loans we make



The failure or inability of borrowers to repay their loans is an inherent risk in the banking business. We take a number of
measures designed to reduce this risk, including the maintenance of stringent loan underwriting policies and the establishment of reserves for possible loan losses and the requirement that borrowers provide collateral that we could sell in the event
they fail to pay their loans. However, the ability of borrowers to repay their loans, the adequacy of our reserves and our ability to sell collateral for amounts sufficient to offset loan losses are affected by a number of factors outside of our
control, such as changes in economic conditions, increases in market rates of interest and changes in the condition or value of the collateral securing our loans. As a result, we could incur losses on the loans we make that will hurt our operating
results and weaken our financial condition.



Government
regulations may impair our operations or restrict our growth



We are subject to extensive supervision and regulation by federal and state bank regulatory agencies. The primary objective of these agencies is to protect bank depositors and other customers and not shareholders, whose respective interests
will often differ. The regulatory agencies have the legal authority to impose restrictions which they believe are needed to protect depositors and customers of banking institutions, even if such restrictions would adversely affect the ability of the
banking institution to expand its business, or result in increases in its costs of doing business or hinder its ability to compete



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with financial services companies that are not regulated or banks or financial service organizations that are less regulated. Additionally, due to the
complex and technical nature of many of the government regulations to which banking organizations are subject, inadvertent violations may occur. In such an event, we would be required to correct or implement measures to prevent a recurrence of such
violations. If more serious violations were to occur, the regulatory agencies could limit our activities or growth, fine us or ultimately put us out of business.



Our computer and network systems may be vulnerable to unforeseen problems and security risks



The computer systems and network infrastructure that we use to provide
automated and Internet banking services could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from fire, power loss, telecommunications failure, earthquakes and
similar catastrophic events and from security breaches. Any of those occurrences could result in damage to or a failure of our computer systems that could cause an interruption in our banking services and, therefore, harm our business, operating
results and financial condition.



Additionally, interruptions
in service and security breaches could lead existing customers to terminate their banking relationships with us and could make it more difficult for us to attract new banking customers.



The loss of key personnel could hurt our financial performance



Our success depends to a great extent on the continued availability of our
existing management, in particular on Raymond E. Dellerba, President and Chief Executive Officer. In addition to their skills and experience as bankers, our executive officers provide us with extensive community ties upon which our competitive
strategy is partially based. We do not maintain key-man life insurance on these executives, other than Mr. Dellerba. As a result, the loss of the services of any of these officers could harm our ability to implement our business strategy.



Evolving regulation of corporate governance and public
disclosure may result in additional expenses and continuing uncertainty



Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and NASDAQ Stock Market rules are creating uncertainty for
companies such as ours. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result
in increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities. If our efforts to comply with new or changed laws, regulations and standards differ from
the activities intended by regulatory or governing bodies due to ambiguities related to our practices, our reputation may be harmed or we may be subject to litigation.



Business Decision to Exit the Wholesale Lending Business might not met the expectation of Management



The risk that our decision to concentrate our capital
and other resources on our commercial banking business by, among other things, exiting the mortgage banking business, will not turn out to be successful, in terms of the objectives underlying that decision, including growing our commercial banking
business and increasing the efficiency of our operations.



Other Risks



Other risks that could
affect our future financial performance are described in the Section entitled Risk Factors in the Prospectus dated December 8, 2003, included in our S-2 Registration Statement filed with the Securities and Exchange Commission under
the Securities Act of 1933, as amended, and in our Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, and readers are urged to
review those risks as well.



Due to these and other possible
uncertainties and risks, readers are cautioned not to place undue reliance on the forward looking statements, which speak only as of the date of this Report. We also disclaim any obligation to update forward-looking statements contained in this
Report or in the above-referenced S-2 Registration Statement or Annual Report on Form 10-K.



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|ITEM 3. | MARKET RISK
|------- | -----------



We are exposed to market risk as a consequence of the normal course of conducting our business activities. The primary market risk to which we are exposed
is interest rate risk. Our interest rate risk arises from the instruments, positions and transactions entered into for purposes other than trading. They include loans, securities, deposit liabilities, and short-term borrowings. Interest rate risk
occurs when assets and liabilities reprice at different times as market interest rates change. Interest rate risk is managed within an overall asset/liability framework for the Company.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------



Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) are designed to
provide reasonable assurance that information required to be disclosed in our reports filed under that Act (the Exchange Act), such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods
specified in the rules of the Securities and Exchange Commission. Our disclosure controls and procedures also are designed to provide reasonable assurance that such information is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.



Our management, under the supervision and with the participation of our Chief Executive Officer and the Chief Financial Officer, evaluated the
effectiveness of our disclosure controls and procedures in effect as of September 30, 2005. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2005, our disclosure controls
and procedures were effective to provide reasonable assurance that material information, relating to the Company and its consolidated subsidiaries, required to be included in our Exchange Act reports, including this Quarterly Report on Form 10-Q, is
made known to management, including the Chief Executive Officer and Chief Financial Officer, on a timely basis.



There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2005 that has materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II



|ITEM 6. | EXHIBITS
|------- | --------



The following documents are filed Exhibits to the Quarterly Report on Form 10-Q:



|             |  |                                                                                             
|------------ |  | --------------------------------------------------------------------------------------------
|Exhibits:    |  |                                                                                             
|             | 
|Exhibit 31.1 |  | Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002
|             | 
|Exhibit 31.2 |  | Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002
|             | 
|Exhibit 32.1 |  | Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002
|             | 
|Exhibit 32.2 |  | Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002



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SIGNATURES



Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                       |  |  |  |                            |  |                   |  |                                       
|---------------------- |  |  |  | -------------------------- |  | ----------------- |  | --------------------------------------
|                       |  |  |  | PACIFIC MERCANTILE BANCORP
|                       |  |  | 
|Date: November 8, 2005 |  |  |  | By:                        |  | /S/ NANCY A. GRAY
|                       |  |  |  |                            |  |                   |  | Nancy A. Gray, Chief Financial Officer



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EXHIBIT INDEX



|            |  |                                                                                             
|----------- |  | --------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                      
|31.1        |  | Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002
|            | 
|31.2        |  | Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002
|            | 
|32.1        |  | Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002
|            | 
|32.2        |  | Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002



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